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3-20-2008

Against Financial Literacy Education
Lauren E. Willis
Loyola Law School, Los Angeles, Lauren.Willis@lls.edu

Recommended Citation
Willis, Lauren E., "Against Financial Literacy Education" (2008). Scholarship at Penn Law. Paper 208. http://lsr.nellco.org/upenn_wps/208

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WILLIS

AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT AGAINST FINANCIAL LITERACY EDUCATION -- 3/20/08 DRAFT 94 Iowa L. Rev. (forthcoming, Nov. 2008) Lauren E. Willis∗ TABLE OF CONTENTS

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I.

INTRODUCTION

II. DOES FINANCIAL LITERACY EDUCATION WORK? III. IS FINANCIAL LITERACY EDUCATION LIKELY TO WORK? A. Information Asymmetries and Chasing Moving Targets B. Insurmountable Knowledge, Comprehension, and Skill Limitations C. Poor Conditions for Debiasing 1. The Intangible Transaction Costs Schematic 2. The Prevalence of Biases in Personal Finance Decisionmaking i. Overwhelming Information and Choices ii. High Financial and Emotional Stakes iii. Discomforting Thoughts. iv. Uncertainty and the Future v. Opaque Attributes and Incommensurate Tradeoffs vi. The Passivity Alternative: Defaults and “Experts” 3. The Difficulty of Debiasing Personal Finance Decisionmaking i. Repeat Play With Immediate Unambiguous Feedback ii. Consider-the-Opposite iii. Consider the Pros and Cons iv. Construct Preferences Before Shopping v. Time and Space for Deliberation vi. Individual Differences D. Reaching Consumers at Teachable and Vulnerable Moments IV. THE COSTS OF FINANCIAL LITERACY EDUCATION A. Paradoxical Effects on Consumer Decisionmaking

Associate Professor, Loyola Law School, Los Angeles (Visiting, University of Pennsylvania School of Law, Spring ‘08). Helpful comments and suggestions from Jean Braucher, Dorothy Brown, Alexandra Natapoff, Chris Sanchirico, and participants at talks given at the University of Pennsylvania School of Law Faculty Ad Hoc series, Philadelphia, PA, the 11th International Conference on Consumer Law, Cape Town, South Africa, the 2007 Jurisgenesis Conference, Washington University, St. Louis, MO, the 7th International Conference on Financial Services, Brussels, Belgium, and the 2008 Annual Meeting of the Association of American Law Schools, New York, NY, are gratefully acknowledged. Much thanks also to Stacy Wiesbrock, John Ohanesian, Leigh Ferrin, and Jonathan Alon for research assistance.

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B. Blaming the Consumer C. Time, Expense, and Inefficient Division of Labor D. Regulatory Opportunity Costs V. CONCLUSION

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AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT I. INTRODUCTION

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There can hardly be a better time to make the case for economic and financial literacy than right now… [W]e face a downturn… fueled, at least in part, by unwise mortgage borrowing… [A] better informed citizenry would likely have resulted in more-prudent decision making and… less harm to the economy. – Federal Reserve Board Governor Frederic 1 S. Mishkin, February 2008 Financial literacy provides the foundation to build wealth and fully participate in the economy…. By understanding basic financial principles and putting them to use, you can be on the road to improving the lives of your household and your community… – NAACP Financial Empowerment Guide2 [T]here needs to be financial education measures in place. – President George W. Bush, regarding home mortgage foreclosure rates, August 20073 Although the cry for financial literacy education has been audible for decades, the volume has recently increased.4 Why? Technological advances allowing industry to create and profit from more complex and riskier financial products offered to a broader array of people, in conjunction with political dominance of an ideology favoring deregulation, have dramatically altered this marketplace. This consumer finance revolution has given Americans more apparent choices and formal control over their personal credit, insurance, and retirement planning decisions. But with this choice and control comes added responsibility to make financial decisions well, or face potentially disastrous health and welfare results. As the SEC’s Division of Investment Management Director put it: “[A]n era of selfreliance has begun. Today we stand at what may be a defining moment in American economic history, as more and more of us are taking responsibility for our own retirement needs.”5 Although defined benefit pension plans once covered many workers, most retirement plans today, when offered at all, are defined contribution, requiring individuals to decide how much to save and how to invest.6 Similarly, employersponsored health insurance has declined, leaving more Americans to find their own policies.7 As for credit, lenders once required evidence of sufficient income, given
Frederic S. Mishkin, Fed. Res. Bd. of Governors, Speech before the Third National Summit on Economic and Financial Literacy: The Importance of Economic Education and Financial Literacy (Feb. 27, 2008). 2 NAACP Financial Empowerment Guide 4 & 5 (2003), available at http://www.naacp.org/pdfs/finance_fei.pdf (last visited Feb. 10, 2008). 3 Remarks by the President in Roundtable Interview with Business Reporters (Aug. 8, 2007), available at http://www.washingtonpost.com/wp-dyn/content/article/2007/08/09/AR2007080900780_pf.html. 4 In pursuit of the creation of a “nation of economic literates,” the first National Conference on Consumer Education was held in 1939. See Leland J. Gordon, Review: Next Steps in Consumer Education, Proceedings of a National Conference on Consumer Education, 6 S. ECON. J. 403 (1940). In the last decade, promotion of financial literacy education has proliferated. See Jump$tart Coalition, Financial Literacy: Improving Education, 2006 National Jump$tart Coalition Survey, Executive Summary at 1. 5 Paul Roye, Protecting Pension Plan Participants Through Investor Education, Keynote Address Before the International Foundation of Employee Benefit Plans (May 9, 2000), available at http://www.sec.gov/news/speech/spch369.htm. 6 See, e.g., GAO, EMPLOYER-SPONSORED HEALTH AND RETIREMENT BENEFITS GAO-07-355 at 28-31 (Mar. 2007) (describing move from defined benefit to defined contribution plans); id. at 38 fig.4 (22% of full-time workers and 62% of part-time or seasonal workers are not offered employer-sponsored retirement benefits). 7 Id. at 17 & 18 Tbl. 1 (reporting declines in both the percentage of workers covered by employer-sponsored health plans and the percentage of employers offering health benefits between 2001 and 2005).
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consumers’ financial obligations, to afford their mortgages. Today’s lenders offer loans requiring little or no documentation, so consumers must determine for themselves what payments they can afford, or risk losing their homes.8 Seller disclosure and largely unfettered consumer choice is the dominant model of regulation in the U.S. for credit, insurance, and investment products. As these products have become more complex and the consequences of consumers’ inability to understand them more dire, financial literacy education is a necessary corollary to the disclosure model. This education is widely believed to turn consumers into “responsible” and “empowered” market players, motivated and competent to handle their own credit, insurance, savings, and investment matters by confidently navigating the bountiful unrestricted marketplace. This vision, which promises both a free market and increased consumer welfare, seduces conservatives and liberals alike. This vision depends on the belief that financial literacy education can not only improve decisions, but can do so to the degree necessary for consumers to protect and even increase their welfare in the modern financial marketplace.9 But what evidence supports this belief? Given what is known about the marketplace and human decisionmaking, how plausible is the belief? What are the costs of financial regulation through education and are these costs commensurate with the benefits it reasonably could be expected to provide? Is there any alternative but to pursue financial literacy? A prior article demonstrated that belief in the effectiveness of financial literacy education lacks empirical support.10 This article argues that the belief is implausible. The gulf between the literacy levels of most Americans and that required to assess the plethora of credit, insurance, and investment products sold today—and new products as they are invented tomorrow—cannot realistically be bridged. Educators would need to impart a sophisticated understanding of finance because rules of thumb are not useful for decisions about complex products in a volatile market. Further, high financial literacy can be necessary for good financial decisionmaking, but is not sufficient; heuristics, biases, and emotional coping mechanisms that interfere with welfare-enhancing personal finance behaviors are unlikely to be eradicated through education, particularly in a dynamic market. To the contrary, the advantage in resources with which to reach consumers that financial services firms enjoy puts firms in a better position to capitalize on decisionmaking biases than educators who seek to train consumers out of them. Harboring this belief may be innocent, but it is not harmless; the pursuit of financial literacy poses costs that almost certainly swamp any benefits. For some consumers, financial education appears to increase confidence without improving ability, potentially leading to worse decisions. When consumers find themselves in dire financial straits, the
Compare David Listokin et al., Fannie Mae Foundation, The Potential and Limitations of Mortgage Innovation in Fostering Homeownership in the United States 27-36 & tbls 6 & 7 (2002) (listing historical loan, borrower, and property underwriting characteristics), with Ending Mortgage Abuse: Safeguarding Homebuyers: Hrg. Before the S. Comm. on Banking, Housing & Urban Affairs, 110th Cong. (2007) (testimony of Michael D. Calhoun, Center for Responsible Lending) (more than a third of loans in a sample of 2007 mortgage backed securities offerings lacked documentation of borrower income). 9 Although beyond the scope of this article, another predicate belief is that poor financial outcomes are to a significant extent the result of illiteracy, independent of income or wealth. For critiques of this belief, see, e.g., A. Mechele Dickerson, Can Shame, Guilt, or Stigma Be Taught? Why Credit-Focused Debtor Education May Not Work, 32 LOY. L.A. L. REV. 945, 958-59 (1999) (noting financial education will not help someone propelled into bankruptcy by job loss, medical expenses, or divorce); Angela C. Lyons et al., Translating Financial Education into Behavior Change for Low-Income Populations, 17 FIN. COUNSELING & PLAN. 27, 41 (2006) (“It may be that some individuals, because of their particular financial situation, are unable to change certain financial behaviors no matter how much financial education they receive.”); Katherine Porter & Deborah Thorne, The Failure of Bankruptcy’s Fresh Start, 92 CORNELL L. REV. 67, 70 (2006) (finding insufficient income, not financial mismanagement, is key barrier to long-term financial health). 10 Lauren E. Willis, Evidence and Ideology in Assessing the Effectiveness of Financial Literacy Education (Jan. 2008).
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Part V suggests alternative policy tools that could be effective. the time value of money in investments and the pooling of risks in insurance). e. Barber & Terrance Odean. financial literacy education is only effective if it enables consumers. This article proceeds as follows: Part II summarizes my prior work finding no reliable empirical evidence that financial literacy programs are effective. The cognitive components of this literacy include “being knowledgeable. planning. 2005). and methodology. 29-35 (Fannie Mae Found. given the complexity and fluidity of the consumer financial marketplace. Financial Literacy and Family and Consumer Sciences. 13 See. 55 J. Programs vary in content. Lois A. 2006). 265 (2007). Closing the Gap Between Knowledge and Behavior—Turning Education into Action (Denver. CO. Bernanke. self-study materials. e. Remarks at the Fifth Regional Issues Conf. 10-12. e. 24 PSYCHOL.. 14. & MARKETING 253. 15 (2002). Howell E. interactive games.. Part III explains why it is implausible that this education could teach consumers how to make welfare-enhancing decisions about credit. Senate Bill 925. literacy advocates.16 Effectiveness must be measured against the decisions and actions our society and marketplace require. See id. 12 11 . FIN.15 Ultimately. Dist. insurance. e. Underconfident consumers tend to shy away from engaging in the information search..17 studies claiming to find support for the financial literacy model suffer a This section summarizes my prior critique of the existing empirical research.14 Consumers’ beliefs about the efficacy of their own financial decisionmaking must match the actual and perceived difficulty of the decision at hand. Part IV exposes some of the costs of pursuing financial regulation through consumer education. Jackson & Stacy A. and the educational component of one-on-one counseling. A Bill to Promote Youth Financial Education. 791 (2000). banking. of the Fifteenth Cong. 16 See.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 5 regulation through education model blames them for their plight. 17 See. Brad M. 15 See Jing Hu et al. But they all aim to achieve welfare-enhancing behavior engaged in as the result of acquired financial literacy. and even academics. credit. and investments. and informed on the issues of managing money and assets. FAMILY & CONSUMER SCI.g. DOES FINANCIAL LITERACY EDUCATION WORK?11 Financial literacy education is conducted through classroom teaching.. 2000). Vitt et al. Jeanne M.g. of Texas (June 13. a single-minded focus on financial education inhibits pursuit of other policy tools for improving the financial welfare of Americans.. and taxes” and “understanding the basic concepts underlying the management of money and assets (e. educated. Increasing Economic Opportunity: Challenges and Strategies. Ben S.g. informational websites. the financial literacy education policy model appears: Although routinely cited by policymakers.”12 Turning cognitive literacy into positive action requires a well-calibrated degree of confidence—neither underconfidence13 nor overconfidence. (2005).. Aug. to make the decisions and take the actions necessary for financial well-being today. investments. National Endowment for Financial Education. Overconfident consumers are unlikely to ask for help when they need it and will spend too little time and effort on financial decisions. given their resource constraints. Requiring consumers to act as their own financial experts is socially inefficient. shaming them and deflecting calls for effective market regulation. audience. Personal Finance and the Rush to Competence: Financial Literacy Education in the U. Opportunity costs should not be overlooked. 773. insurance.S.. industry. 94 J. The Relationship Between Task Complexity and Information Search: The Role of SelfEfficacy.g. 1st Sess. Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Diagramed. and calculations that good financial decisions require. Hogarth. 109th Cong. II.g. 14 See..

g. BULL. An Empirical Study of Debtor Education in Bankruptcy: Impact on Chapter 13 Completion Not Shown. see Marsha J. consumers who attended retirement-related financial classes thought their literacy had increased. see Jinhee Kim et al. L. Courchane & Peter M. Res. Garrett. 75.g.” B. lowered payments. one frequently-cited study claims that a reduction in open accounts is evidence that financial education is effective.22 Second. Sys.g. Financial Behaviors. 133 PSYCHOL. Zorn. 40 J. to overstate the extent to which they are behaving as they were taught they should. Although the directive to close accounts is common. see Gregory E. Savings and Asset Accumulation in Individual Development Accounts. (Apr. PUB. 467 (1998). e. GERONTOLOGY 447.philadelphiafed. Elliehausen et al. see Mark Schreiner et al.. Saving for Retirement on the Path of Least Resistance 308. 2006). Conf. rather than behavior. & PUBLIC POL’Y 831.20 High nonrandom nonresponse rates similarly skew the data—those who think they have changed their behavior are likely to be the most eager to report it.24 Credit counselors can intervene with creditors. 2001). (Apr. in LOWINCOME HOMEOWNERSHIP: EXAMINING THE UNEXAMINED GOAL 147 (Nicolas Retsinas & Eric Belsky. Lyons et al. eds.. Sensitive Questions in Surveys. In another. Comm. Douglas Bernheim & Daniel M. 77 (2003) (“The first requirement for credit counseling clients is to cut up all their credit cards and close the accounts. First. 24 For a study without controls for cash assistance. 21 See. Affs Res. 1. Abdighani Hirad & Peter M.. intentionally or unconsciously. 19 In one study. give the consumer rote assignments (e. or special loan programs. 41 J..25 Changes in participants after the Anderson. A Little Knowledge Is a Good Thing: Empirical Evidence of the Effectiveness of Pre-Purchase Homeownership Counseling. Comm. The Impact of Credit Counseling on Subsequent Borrower Behavior. outcomes may be attributable to the assistance rather than the education. DC: Fed. Res. 27 (2007). in BEHAVIORAL PUBLIC FINANCE (Ed McCaffrey & Joel Slemrod eds. e. 2002) (explaining that their finding that classroom homeownership education was effective but self-study and telephone counseling were not could reflect individualized teacher directions to participants). 208. available at http://www. Affs Res. . ECON.21 Attempting to connect current financial condition with respondent self-reports of having learned from past classes or seminars introduces potential recall bias—people who have experienced good financial outcomes are more likely to think they “learned” from a class and to remember having taken one at all. CONSUMER AFF..23 Assistance can include financial rewards. BANKR. Are We Making the Grade? A National Overview of Financial Education and Program Evaluation. James Choi et al. REV.”). 2004). Zorn. The Effects of Financial Education in the Workplace: Evidence From a Survey of Households.. Most rely on participant self-assessments of whether the course changed their own knowledge. 557. 218-19 (2006)..g. 9 AM. “do not sign for this loan because I have determined you cannot afford it”). but their scores on financial tests did not. COUNSELING & PLAN. lenders. because programs often bundle direct assistance with education. n.L. Fed. Danes. 859.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 6 variety of fatal weaknesses. Can States Tax National Banks to Educate Consumers About Predatory Lending Practices?. Conf.. 875-76 & 877 (2007). Relationships Among Credit Counseling Clients’ Financial Well-being.”). confidence.19 Data from follow-up surveys suffer from a similar bias because participants are likely. 1487.18 But people overestimate how much they have learned and how much their future behavior will change. 18 For a study using participant self-assessments to evaluate financial education.org/cca/capubs/homeowner.. 1489 (2003). 25 See. Financial Stressor Events.. 24 EDUC. and behaviors. 574-75 (2001) (finding positive effect of bankruptcy debtor education disappeared after controlling for easier repayment plans and other assistance). or credit bureaus on behalf of the participant. and those who do not are less likely to respond. Sys.__ (2007).. 87 J. 14 FIN. Angela C. e. 22 For a study relying on respondent recall of exposure to financial education. or impose self-control devices. 30 HARVARD J. employees who reported at the end of a retirement investing seminar they would increase their savings generally failed to do so. 23 See Jean Braucher. HOME OWNERSHIP EDUCATION AND COUNSELING: ISSUES IN RESEARCH AND DEFINITION 11 (2001). ALAN MALLACH. One study of financial education using consumer self-reports of savings admits that “education may affect reporting. Evaluation of the National Endowment for Financial Education High School Financial Planning Program (2004). INST. Roger Tourangeau & Ting Yan. Washington. Douglas A. and Health. see Sharon M. Hershey et al. CONSUMER AFF. Consumer Literacy and Creditworthiness. many use data collection techniques biased toward finding that this education is effective. 20 See. Challenges of Training PreRetirees to Make Sound Financial Planning Decisions.pdf (“[S]ome of those involved … believe that the most effective aspect … is not the counseling itself but the act of intervention [by the counselor] with the lender.

the policymakers who embrace regulation through financial literacy education expect educated consumers to be able to do far more.26 The improved financial outcomes sometimes experienced by consumers who receive education may reflect that the same factors that led them to participate in the education would have led them to engage in welfareenhancing financial behavior regardless. Selection into Financial Literacy Programs. 31 GAO. 2. Thomas Garman et al.usda. Chau Nguyen. which are potential policy tools for improving consumer welfare but are not financial literacy education. ISSUES 265 (2007). Researchers generally cannot randomize citizens into treatment and control groups. e. & ECON. credit counseling session).g.. card issuers lose more in interest and fees than they would have lost due to charge-offs of uncollectible debts from consumers with poorer financial habits.28 but this may reflect overconfidence.S. and lower financial discount rates were more likely to accept an offer of a brief. U. e. 32 When consumers charge less and do not incur late fees.29 The questions. Some are factual—for example. 2006). whether someone with income of $2000 and expenses of $800 for rent and $200 for groceries who spends another $700 each month will need 1. The Impact of Personal Finance Education Delivered in High School and College Courses. 28 See. available at http://www. Finally. and Extension Service. and Pending Bankruptcy Legislation. not the accurate degree of confidence in one’s own knowledge and skills needed for good financial behaviors. 10 FIN COUNSELING & PLAN. Richard L. . 23 BEHAV.30 As discussed further below.. 241 (2001). SCI. on average.pdf. A third problem is self-selection bias introduced because participation in financial education is usually voluntary. whether annual returns on a diversified U. free. Weiner et al. Workplace Financial Education Improves Personal Financial Wellness. 29 See.. 15%. exceed credit limits. Department of Agriculture. Debtor Education. the net effect on the issuer is a decrease in card issuer profits. and/or do not pay off balances each month than they do on accounts that produce only merchant fees. more financial knowledge. are inadequate to demonstrate whether even a high scorer could make welfare-enhancing decisions in today’s marketplace. & THE LAW 347 (2005).S. the improvements that have been claimed have been far shy of the financial literacy education model’s goal.g. 35 J. CONSUMER AFF. therefore. or 25%.27 Putting aside methodological weaknesses. GAO-06-929 at 67 (Sept. e. 79 (1999). State Curriculum Mandates and Student Knowledge of Personal Finance. or may experience less embarrassment or denial due to fewer past financial problems. others specify the figures with which calculations must be performed—for example.. see. to participation in financial literacy education.gov/nea/economics/pdfs/fsll_impacts_jan06. FAM. it is revealing that industry universally supports financial literacy programs even though customers who exercise welfare-enhancing personal financial behaviors are less profitable. e. 27 For a study without controls for self-selection. Financial Security in Later Life Impact Report.32 Investment firms derive 26 See. Studies based on testing attribute less than a single additional correct answer.g. 28 J. 3. 30 The first question is from the National Association of Securities Dealers investment knowledge test and the second is from the Jump$tart Coalition’s 2006 National Financial Literacy survey of high school seniors. 20%.g. may possess personalities more conducive to welfareenhancing financial behavior.. CREDIT CARDS: INCREASED COMPLEXITY IN RATES AND FEES HEIGHTENS NEED FOR MORE EFFECTIVE DISCLOSURES TO CONSUMERS. Some investigations have found that personal finance courses increase confidence.csrees. Federal Reserve Bank of Boston Discussion Paper No. Financial Literacy. stock mutual fund “can be expected” to average 5%. or 4 months to save $900. 2007). (finding that consumers with more education.. E. Individuals who choose to attend personal finance classes may be better informed or more motivated. earn more on accounts that pay late. moreover. 10%. and. Credit card issuers obtain about 80 percent of their revenues from finance charges and penalty fees. Education. Sharon Tennyson & C. may have more free time for researching and making financial decisions..31 When consumers engage in better financial behavior. Stephan Meier & Charles Sprenger. 07-5 (Nov. Tzu-Chin Martina Peng et al. Cooperative State Research.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 7 education could be due to these types of assistance. and in an environment in which the answers are not multiple-choice.

COM. services. Todd. literacy education is. 33 Although investor education instructs consumers to minimize mutual fund fees. National Programs webpage. Debt Collectors Try to Put on a Friendlier Face. 9.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 8 higher profits from the sale of funds that generate higher management fees. Res.coalitionforfinancialchoice. Bank of Chicago Proceedings 12 (Apr 2005). 2005) (documenting that in 2005 JP Morgan Chase allotted $50 million to financial literacy and home buyer education programs). But is it plausible that financial literacy programs would work? Examining the skills and biases with which consumers currently operate and the structure and offerings of today’s largely unregulated financial services marketplace. fund advertisements rarely mention them. .33 Insurers similarly benefit from policies that cost more and cover less. in CONSUMER BANKRUPTCY IN GLOBAL PERSPECTIVE 319.asp?Page=natprogs. Mar. which are funded from payments that otherwise would be distributed to creditors and which.3 million in 2005 on financial and economic literacy). As the National Strategy for Financial Literacy explains: Personal financial management is an extremely complex matter that requires significant resources and commitment by consumers to understand and evaluate the multitude of products available in the broad financial services market….” Id.Y. Fed.35 Even payday lenders and check-cashers are on the bandwagon. 38 Cf. 36 Press Release. e.org.html (announcing spending $1. with new products. She suggests that creditors expect these programs to have “no effect on behavior” but to “deliver the rhetorical advantage of emphasizing debtor responsibility. who are launching an internet-based personal financial management course even though they only make money 37 That industry supports financial when consumers fail to pay their debts on time. but without an impact on the bottom line. available at www. Aug. Coalition for Financial Choice Advocates for Basic Rights in Financial Services for All Consumers (Jan.39 Information asymmetry between sellers and consumers is inherent in such a market. 305 (2005). Not only do sellers have access to more information and resources to analyze it. manifold. 2007). Jean Braucher.”36 So too debt collectors. IS FINANCIAL LITERACY EDUCATION LIKELY TO WORK? If financial literacy education’s effectiveness as a policy tool cannot be empirically validated. TAKING OWNERSHIP OF THE FUTURE: THE NATIONAL STRATEGY FOR FINANCIAL LITERACY vii (2006) [hereinafter.allstate. the range of topics and issues that consumers must evaluate is vast and ever-growing. Allstate Community Commitment website. III. Debtor Education in Bankruptcy: The Perspective of Interest Analysis. Effectiveness of Online “Early Intervention” Financial Education for Credit Cardholders. TAKING OWNERSHIP]. although consumers are better off with indexed or other low fee funds. available at http://www. the prospects for financial education as an effective policy tool are bleak. and providers emerging to meet consumer demand. perhaps the strongest evidence that this education is 38 not effective in improving consumer financial decisions. As a result. 39 U. TIMES. 34 See David Dietz & Darrell Preston. but by the Kimberly Gartner & Richard M.S. eds. 37 David Streitfeld. Bruce A Huhmann & Nalinaksha Bhattacharyya. denial. disclosure and transparency in all financial transactions. the mission of their trade group includes “[i]mprov[ing] consumer protections through education. 2003). Information Asymmetries and Chasing Moving Targets The consumer financial products available in today’s marketplace are bountiful. FINANCIAL LITERACY AND EDUCATION COMMISSION. BLOOMBERG. [T]he marketplace is constantly changing. 35 See. Does Mutual Fund Advertising Provide Necessary Investment Information?. and record home insurer profits). Braucher details creditor support for bankruptcy education programs. BANK MKTG. and postponements of claim payouts.com/Community/PageRender. 296. 14. 2008. A. 337-39 (Johanna Niemi-Kiesilainen et al.. both rhetorically and with multi-million dollar donations. systematic underpayment. 2005 Survey of BankSponsored Financial Literacy Programs 11 (Apr. N.. Consumer Bankers Assoc. and dynamic. at 339. 2007 (reporting increasing numbers of coverage exclusions. if efficacious. while indirect. one response might be that educators just have not found the right way to educate people.. Home Insurers’ Secret Tactics Cheat Fire Victims. would reduce demand for high-cost credit. 23 INT’L J.g.34 Yet these firms uniformly support financial literacy initiatives. Hike Profits. 3.

Financial literacy education is chasing a moving target it will never reach. Nonetheless. 45 See GAO. supra note__.42 Each product is theoretically responsive to the needs of different consumer segments. resulting in a constant expected return to the seller. AM. Each small change in one variable can be met by a change in another variable. 10.46 In June 2007.45 As a result. Outdated lessons may be not only irrelevant. 40 .WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 9 time the latest insurance. advances in data collection. Life insurers can compensate for a consumer’s refusal to undergo a medical examination. 43 Kaiser Family Foundation. the marketplace will have changed.3 (2006) (finding that among plans administered by Vanguard the number of funds offered varied between 4 and 59 and the median number offered was 13). credit. 2006). May 5. Robert Pear.44 Credit cards carry multiple rates for various balances. Meg Fletcher. N. 109 NAT’L UNDERWRITER: LIFE & HEALTH 37. Technological change—specifically. storage. e. For example. e. Willis. each consisting of a cocktail of terms. For example.40 Insurers. 61 J. 41 BUS. and issuers can reset each rate monthly. 763 & 768 n. feed them into a multivariate model. and investment companies now have the capacity to take millions of data points mined from past consumers. yet the complexity and proliferation of new products impairs consumers’ ability to identify which products are appropriate for them. at 1. 2007). 65 MD. Medicare Fact Sheet at 1 (Nov. future monthly payment. Dec. BANKER.g.. Linda Koco. 42 See. seniors are offered over 50 Medicare drug plans in almost every state. each of these rates can be variable. which might have led to a per se rejection in the past. and processing—has revolutionized the ability of the financial services industry to model behavior to more accurately forecast each consumer’s future profitability and the risks of each transaction. such as a medical student in a residency or a purchaser of a home needing renovations. Choice by 401(k) Plan Participants: Equity Exposure and Number of Funds. L. For example. Medicare Part D Plan Characteristics 2007.g. 44 Gur Huberman & Wei Jiang. loans structured to have low monthly payments followed by larger monthly payments—called “2/28” or “exploding” adjustable rate mortgages (ARMs) because payments spike up after a typically two-year teaser period— are useful for those with incomes scheduled to increase sharply or expenses expected to decrease sharply. but did not restrict sale of these loans to only consumers for For a fuller explanation.43 A single defined contribution retirement plan might contain dozens of investment funds. and generate a constantly updated predictive tool that. 763.Y. Offering vs. FIN. see Lauren E. at 14-15. products are sold to consumers outside the niche for which the products were ostensibly developed. Shifting Markets Demand Cutting-Edge Ideas. INS.. 109-11 (2006). by increasing the policy price or decreasing the expected payout. 41 See. is more accurate and more sensitive to the interactions among variables than human judgment. CREDIT CARDS. Drug Plan Companies Failed to Tell of Changes. 27. but counterproductive. credit can be priced according to risk rather than rationed. A18 (June 18. although imperfect. Decisionmaking and the Limits of Disclosure: The Problem of Predatory Lending: Price. some so complex that over 30 pages are needed to explain annual changes in costs and benefits. federal banking regulators instructed institutions selling these ARMs to evaluate the repayment ability of consumers with poor credit histories using the higher. each requiring its own novella-length prospectus to explain its holdings and operations. lenders. 2005. 101. 46 Jody Shenn. or investment developments filter through educators to consumers. Mortgage Risk Debate Heating Up. 2006 at A18.41 Computer-driven modeling allows financial firms to develop an array of niche offerings. “mortgages with the potential for severe payment shocks … once considered niche products” are now sold to households that do not expect an income or expense change. TIMES. Innovation With Riders—And Without. as a 2005 article in The American Banker explained. REV.. id. 37 (2005).

naic. at A18.com. 48 47 . but ultimately..C. 2007.”50 For example.569 & n. and Disclosure Practices of the Credit Card Industry. To stay competitive—and thereby outpacing regulation—consumer financial product innovation has become institutionalized as “product lifecycle management. Annual Report. HEDGEWORLD DAILY NEWS. 55 National Association of Insurance Commissioners. 52 Daniel Costello.55 Even without new products. 12. available at http://www. in 2007 the mortgage lender Ditech began selling a product that integrates a home mortgage with a home equity line and a credit card account. 2007). supra note__. 53 Examining the Billing. L.Y. N.49 These niche offerings are ever-changing. Harvard Law School). 49 See. enabling sellers to change the product consumers have already bought rather than selling them new products. Alan S. Deutsche Offers Portable Alpha to the Masses.prnewswire. and Their Impact on Customers: Hrg. 50 Fletcher. The latest “in a growing lineup of new investment products”48 combines risky investments with derivatives to hedge exposure and promises the individual an opportunity to earn returns previously only available to institutional investors in hedge funds.pdf. 2007). These riders are not mere variations on older wellknown products. policies can be customized with a host of riders. Chidem Kurdas. available at http://www. Hospital Bills—But with Interest.53 Insurance products might appear to be less fluid. ensuring that our constituents have insurance available to them through a wealth of products that effectively meet individual needs.54 Nevertheless. Sept. offered by hospital chains and health maintenance organizations to consumers to pay for medical bills.A. 37. The Modern Process of Financial Innovation and the Vulnerability of a Regulatory Paradigm. allowing insurers to go “deeper into the insurance design frontier” without the time and expense of bringing a new product to market. & Urban Affairs. The National Association of Insurance Companies promotes this agenda thus: [The] Speed to Market initiative not only benefits regulators and insurers through the streamlining of the rate and form filing process. Housing. 72 Fed. In unveiling the product in August 2007. 333. A typical card allows users to charge up to $5. with a 9 percent interest rate during the first year and a 23 percent interest rate for balances then remaining. 54 44 CORPUS JURIS SECUNDUM INSURANCE § 298 (2007). 2007. 110th Cong. Reg. PA. TIMES. Binder. on Banking. making household equity almost entirely liquid. 23 (July 10.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 10 whom they were designed. 30. REV. they are “next-generation” riders. Henry T. at 37. with fresh products regularly replacing existing products in the personal finance version of planned obsolescence. so unique companies file for patent protection on them.52 Generalpurpose credit cards are perhaps the most volatile financial product because an issuer can change terms unilaterally on 15 days notice.56 Final Interagency Statement on Subprime Mortgage Lending. L. given that state approval is needed before they are sold. 138 U. e. TIMES. 10. Yet during this same time period sophisticated investors were claiming they did not understand derivative products they had purchased in the mortgage securities market. Hu. Comm. Dec. at C34.g. 2005. benefits consumers. Leo Gottlieb Professor of Law. the industry’s priority today is bringing new products through the regulatory process to market more quickly. Marketing.47 Consumers today can invest in vehicles developed for sophisticated investors. Before the S. Ditech Real Life Plan Empowers Customers with Package of Home Finance Solutions (May 21. 340 (1989) (making similar observation about corporate finance products). supra note__. Swaps. at F1.000 of medical debts. at 1.51 Another recent invention is the medical credit card. The one hypothetical example the regulators provided assumes consumers accepting these loans will not have an income or expense change. the managing director of Deutsche Bank’s retail unit described it as a “simple solution” that employs an “easily accessible” strategy. Aug. Cf.org/documents/about_2005_annual_report. 6-7 (2007) (testimony of Elizabeth Warren. 56 Koco. 51 PR Newswire. Six Fingers of Blame in the Mortgage Mess.

theoretically. Secretary of the Treasury Henry Paulson responded to criticism of the government’s failure to act to prevent the home foreclosure crisis by explaining 57 Hu. . 2006.58 Education is a policy tool requiring consumers to be their own regulators in a domain in which even professional regulators have difficulty.html (Nov. Banks Warned They Must Scale Back on Payment Option Mortgage. http://www. 2006) [hereinafter.. the end of the negative amortization option causes the monthly payment due to spike.htm.60 When option ARMs are sold to those who cannot afford more than the minimum monthly payment. 64 Id. the same complexity and fluidity preventing individuals from making good financial decisions may induce regulators to proclaim reliance on education so that consumers.59 This product is appropriate for the few individuals who use the options to handle highly fluctuating income or expenses but can afford the payments over the long haul. However.66 In September 2007. The brochure does not answer the question posed in its title. The less-than-fullyamortizing payment option ends when the principal reaches an amount set by the lender to protect its collateral.gov/news/news/press/2006/pr06093. a third of U. 2006). as well as its ability to understand the products well enough to educate people about them. Kenneth R. 2006. Empowerment of Whom and for What? Financial Literacy Education and the New Regulation of Consumer Financial Services. The “option” or “pick-a-payment” ARM provides a case study. and regulations—once they are vetted politically and have survived notice and comment—are designed for a market gone by. month after month. 11.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 11 The velocity of change in the marketplace means regulators are perpetually struggling to keep up. option ARMs were defaulting at an alarming rate. 58 Cf. which typically include a fully amortizing principal and interest payment. Mara Der Hovanesian. 2005).S. 11. 66 Press Release. 28 LAW & POL’Y 226. putting the borrowers into default and foreclosure. S. 27. home mortgage originations were option ARMs. 2005). Aug. at K14. 62 Dugan. Harney. CHRON. Nightmare Mortgages. 61 Kenneth R. BUSINESSWEEK. See Remarks by Federal Reserve Governor Susan Schmidt Bies (Oct. supra note__. supra note__. it explains how option ARMs work and leaves consumers to regulate the market for themselves. 60 Remarks by John C. in 2003 the Comptroller of the Currency acknowledged that these mortgages were being “mass marketed as ‘affordability products’”62 to homeowners who. Dugan. These payment options are periodically recast to reflect outstanding principal.F. Ironically. Payment Spikes Might Gore Those with ARMs. CHRON. 27. OPTION ARM HANDBOOK]. 20. OPTION ARM HANDBOOK. at 10. made only minimum payments. Harney. OF GOVERNORS OF THE FED. S.fdic. will protect themselves. Toni Williams. 233 & 240 (2007) (suggesting financial education “reliev[es] regulators of some of their responsibility for the state of the market” and can be used to “manage the risk of blame for regulatory failure”). at K12.65 Thus.61 Although option ARMs were developed as a cash management tool. 12. These mortgages permit borrowers to choose each month among various payment options. at 406 (describing admission by IRS officer: “financial markets have been inventing new products faster than the Internal Revenue Service can keep up with”). “Information lag”57 affects the government’s ability to regulate these financial products substantively. an interest-only payment. homeowners were making only the minimum payment. supra note__. 1. Sept. 65 Defaults were so high in 2005 that ratings agencies started requiring credit enhancements for securities backed by option ARMs. Dec.63 In 2005. Before the Consumer Federation of America 9 (Dec. INTEREST-ONLY MORTGAGE PAYMENTS AND PAYMENT-OPTION ARMS: ARE THEY FOR YOU? (Nov. “Payment-Option ARMs: Are They for You?” Instead. 2005. and a negative amortization payment that results in capitalized unpaid interest.. and knew it was causing serious defaults by 2005 at the latest.gov/BoardDocs/Speeches/2005/200510122/default..F.. 63 On more than 70% of option ARMs outstanding in 2005-06. Comptroller of the Currency. RESERVE. 59 BD. the first federal agency consumer education material even mentioning option ARMs was not published until October 2006.64 That same year. federal regulators knew no later than 2003 the product was being sold predominately outside its appropriate niche.federalreserve. available at http:// www.

. Paulson. Aug. Hogarth. 74 Jinkook Lee & Jeanne M. 72 Adult Financial Literacy Conference. comprehension. 18 J. they cannot make welfare-enhancing tradeoffs among these. TIMES. on Recommendations from the President’s Working Group on Financial Markets (Mar. Paulson.71 With industry always at least one step ahead. knowledge of concepts and terminology. percentages. 12 CFR 226.”67 The following month.. 2007). The gulf between the knowledge.htm 70 DEANNE LOONIN ET AL. 69 Remarks by Henry M. there is “‘an enormous disconnect between the educational and informational needs of Americans and the programs and information provided by the government and financial literacy advocates. educators are in no position to do so. available at http://www. FINANCIAL FOCUS 22 (Apr. have failed spectacularly. 70 (1999). 2006). understanding of arithmetic calculations. 13.” but that “we would not want it the other way around. NEW BURDENS BUT FEW BENEFITS: AN EXAMINATION OF THE BANKRUPTCY COUNSELING AND EDUCATION REQUIREMENT IN MASSACHUSETTS 37 (National Consumer Law Center. 2008) available at http://www. e.’”72 B. and health.. Secretary Paulson went further. [GET bias reports].. the law has required creditors to use APR to disclose the cost of credit. and inflation. these programs will inevitably have a bias toward teaching lessons that will increase industry’s profits.” If the regulators cannot or do not want to keep up.”68 By March 2008. Georgetown University Law Center (Oct. Regulation Z.. See.org (quoting executive director of Networks Financial Institute). insurance. 71 ROBERT LERMAN & ELIZABETH BELL. and Numeric Skill Limitations The knowledge. and predictions about market factors such as interest rates. June 2007). Paulson Cautions Against Rush to Regulation in Credit Crisis. lower. and (most) fees over the term of the loan. points.gov/press/releases/hp872. Secretary of the Treasury.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 12 that “[h]istory says it’s very difficult for policy to keep up with innovation. For forty years.ustreas. Comprehension. on Current Housing and Mortgage Market Developments. predictions about one’s own future income. for example. and skills necessary to make independent. and investments require.g. or the same as the note or loan contract interest rate—fewer than would have guessed the correct answer by chance.70 The answers to some financial literacy tests appear to be flawed. at C1. 16. A “lowest APR” rule will not help them choose between two loans with the same APR and term but different James Kanter.Y. 8 (Urban Institute. with the economy diving into recession. and probabilities.74 Although people need not know what APR means to learn a rule-of-thumb to shop for the lowest APR. so as to help consumers compare the cost of credit products through a single metric that incorporates both fees and interest. 73 Truth in Lending Act. Decisions about credit. 2006). he admitted that “regulation needs to catch 69 up with innovation.18(e). Efforts to teach consumers the meaning of “annual percentage rate” (“APR”). expenses. comprehension. POL’Y & MARKETING 66.73 But only 10 percent of surveyed consumers who had applied for or obtained home loans in the previous five years understood the concept well enough to accurately answer whether the APR is higher.networksfinancialinstitute. comprehension of fractions. The Price of Money: Consumers’ Understanding of APRs and Contract Interest Rates. Although industry-provided programs might be more up-to-date. e. 2007. PUB. extraction of information from text. FINANCIAL LITERACY STRATEGIES: WHERE DO WE GO FROM HERE?: OPPORTUNITY AND OWNERSHIP PROJECT REPORT NO. 1. One investigation found erroneous information being taught at the financial education courses that consumers who declare bankruptcy are required to take. raising the suspicion that the material taught is too. stating not only that “innovation often outpaces regulation. 67 . if they do not understand that it represents interest. and skills of most American adults and those needed in today’s market cannot be bridged by financial literacy education. 68 Remarks by Henry M. Secretary of the Treasury. 18. Insurmountable Knowledge.g. welfareenhancing decisions in today’s personal financial marketplace are prodigious. Jr. Sept. N. Jr. investment fund performance.

Federal regulators. people have difficulty understanding the information. 31830 (June 8. adults cannot read beyond the eighth-grade level. GAO supra note__. consumers need sufficient understanding of the underlying concepts to know which calculations to make. Further. and compounding and amortization calculations. 31826. and performing implied arithmetic operations. without sufficient understanding to know when and why “lowest APR” is a good rule. 12 ADULT BASIC EDUC. extracting figures. Even with calculating aids. 31825. and interest. 8 J. 77 Iddo Gal. division. A readability assessment of credit card holder agreements found that information regarding grace periods. Reg. in addition to being specialized and unintuitive. fees. 20. a review of life insurance policies found their technical language and tabular format placed their readability somewhere between The Wall Street Journal and Einstein's The Meaning of Relativity. 23 (2002)..WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 13 combinations of points. 475 (1982). 2007).75 Personal finance decisions routinely require searching for information. 78 Roger A. Systemic Needs in Adult Numeracy Education.78 Evaluating financial courses of action often requires multiplication. when financial products were simpler. usually are neither standardized nor static. balance computation methods. Almost half of U. Illustrations of Consumer Information for Nontraditional Mortgage Products. Choice Strategy in a Difficult Task Environment. CONSUMER RES. Formisano et al. 474. 72 Fed.S. and payment allocation methods was written at a fifteenth-grade or higher level. at 38. for example. 76 75 . much of which must be extracted from text to be useable. recently issued the following illustration of what sellers of interest-only or paymentoption ARMs should provide to “assist consumers in their product selection decisions”:76 But when faced with tables or graphs. The modern marketplace exacerbates consumer incomprehension because the jargon and acronyms used. they have little allegiance to it and can be swayed by sales techniques that downplay APR.77 Even twenty-five years ago.

21 tbl. eds. Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs. However.8 percent will cost over $50. at 76. People tend to conceptualize probabilities as only a few focal points such as very likely. 1982) [hereinafter.19”). How much would you have in the account at the end of two years?”79 Nearly half of the respondents did not understand compounding and many others could not multiply and add well enough to calculate 10 percent interest on $200 over two periods.com/brm/mortgage-calculator.80 In an experiment giving subjects investment returns information in percentage terms (shares that had been $1 “experienced a 19 percent decrease”) or in dollar terms (shares “decreased by $0. 1 (Daniel Kahneman et al. For example..85 yet many major personal finance decisions must be made by evaluating large numbers. as numbers become larger. Fifty-Fifty = 50%?.84 At the extreme. somewhat likely. RISK & INS. 82 See DEHAENE.87 For example. in which most people have poor arithmetic intuitions.000 and a $259.8 percent interest rate as identical even though a $240. Mitchell & James F.com’s mortgage calculator. ECON. available at http://www. BEHAV. 81 Enrico Rubaltelli et al. however. MAKING 149. 35. over 80 percent of Baby Boomers approaching retirement could not correctly answer the following question: “Let’s say you have 200 dollars in a savings account. Introduction in JUDGMENT UNDER UNCERTAINTY: HEURISTICS AND BIASES 1. 39 (2007).000 broker fee is added. . 6 J. THE NUMBER SENSE: HOW THE MIND CREATES MATHEMATICS 88 (1997). The account earns 10 percent interest per year.86 Important financial decisions require reasonably accurate forecasts based on probabilistic information. Mitchell. 86 Olivia S. For example.asp. 65 J. someone who could distinguish between paying $250 per month and $300 per month for health insurance might fail to appreciate the difference between a $252. 19. apparently responding to the percentage term as if it were a whole integer. rather than on a continuous probability scale. using 1998 figures. 87 See Kenneth Joseph Arrow.bankrate.81 Sometimes people ignore fractional amounts entirely. 42 BUS. but the collective probability of becoming sick with at least one 79 Annamaria Lusardi & Olivia S. 16 ECON. subjects were more likely to take action (sell the stock) in response to the percentage information than the dollar format. Large dollar values can be too big to comprehend for those who rarely encounter them. Moore.000 mortgage after a $7. even when the numbers remain equally far apart. 88 See Baruch Fischhoff & Wandi Bruine de Bruin. however. INQUIRY 157 (1978). the probability of becoming sick with any particular major illness may be small.88 This modal understanding of probabilities can lead to poor decisions.83 Personal finance decisions often involve amounts of money greatly exceeding the consumer’s daily experience. The Future and the Present in Economic Life. Can Americans Afford to Retire? New Evidence on Retirement Saving Adequacy. Probabilities are another area. DEC. 80 STANISLAS DEHAENE. Numerical Information Format and Investment Decisions.1 & 23 (2005). JUU].000 of savings could determine whether a married couple could retire at age 65.82 treating a 10 percent and a 10. FIN. supra note__. the difference between $504.700 versus $567. BEHAV. 83 Calculations performed using Bankrate. forecasting future medical needs and the cost of medical care is necessary to compare one insurance plan with a high deductible and comprehensive catastrophic coverage to another with a low deductible and many exclusions or coverage limits. or very unlikely. 160 (May 1999).WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 14 In a 2006 survey.000 more than the same loan at 10 percent. 380 (1998). at 80. 371. 12 J. Facility with fractions and percentages is required for many personal finance decisions. but people often treat all numerical values as whole positive integers. 84 DEHAENE. supra note__.. 85 Amos Tversky & Daniel Kahneman.000 30-year fixed rate mortgage at 10. people have greater difficulty distinguishing between them.

14.. insurance. at 1. employee benefits. BEHAV. this would not be enough. Out of Control: Visceral Influences on Behavior. risk management and insurance. 2006). There is no evidence that financial literacy education can change Neil D. MONOGRAPHS 15.or under-weighting various considerations when making a decision. GEN.S. estate planning.. supra note__.com/home/media/press_releases/2006 _Press_Releases/The_Price_is_em_Wrong_em_Most_Americans_Significantly_Underestimate_Health_Care _Costs_Survey_Shows_December_14_2006.92 It is implausible that financial literacy education could impart the knowledge. 1 REV. at 597. and multiply these figures.html. 65 ORG. Survey Shows (Dec. 2000) [hereinafter. To complete the worksheets. 89 . and investment markets. 145. These influences include: biases that systematically lead to over. 17-18. 97 George Loewenstein. in JUU. available at http://www.97 The following describes the ubiquity of these “biases” in personal finance decisionmaking. 96 Roy F. Weinstein.healthmarkets. 92 U. pain. and skills consumers need to do what society currently demands. The Price is Wrong: Most Americans Significantly Underestimate Health Care Costs. C. predict their monthly expenses in retirement.. determining the expected value of many financial choices requires assessing information reliability and interpreting results. DEPARTMENT OF LABOR. a ten-hour exam that requires an integrated application of skills and knowledge to particular client situations. The skills needed to take data about the past and information about the future and predict the probabilities of future events and confidence intervals for those probabilities are elusive for even sophisticated consumers. 91 CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS. Baumeister. investments and individual income tax. PSYCHOL. GUIDE TO CFP® CERTIFICATION 5 (2006). 1. 90 Press Release. Introduction. HealthMarkets. which most consumers underestimate. 93 Amos Tversky & Daniel Kahneman. Self-Regulatory Breakdown. subtract. and thirty hours of continuing education every two years to maintain the credential.95 coping mechanisms that avoid or limit emotional discomfort during decisionmaking. fear) that overwhelm reasoning. The U. and Emotional Distress as Factors in SelfDefeating Behavior. and repeatedly add. VALUES. Esteem Threat. 1999 J.96 and visceral drives (hunger. retirement planning. Becoming a Certified Financial Planner therefore requires a program of study that includes financial planning.89 If the consumer discounts small risks to zero then the collective probability of needing medical care. AND FRAMES 17 (Daniel Kahneman & Amos Tversky eds. but also the ability to employ all of them at once.91 Consumers must acquire not only the particular knowledge and skills described above.S. comprehension. NAT’L CANCER INST. in CVF.93 mental rules of thumb or “heuristics” by which complex decision tasks are reduced “to simpler judgmental operations”. three years of relevant experience.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 15 such illness is much higher. supra note__. Psychologists and behavioral economists have catalogued a host of influences apart from skill or information deficits that can interfere with decisionmaking. Prospect Theory: An Analysis of Decision Under Risk in CHOICES. What Does It Mean to Understand a Risk? Evaluating Risk Comprehension. In addition to arithmetic manipulation of data. 148 (1997).94 attraction to decisions that superficially appear consistent. 94 Tversky & Kahneman. Reason-Based Choice.90 could appear too small to warrant buying insurance. 600. CVF]. INC. 95 Eldar Shafir et al. Department of Labor’s Taking the Mystery Out of Retirement Planning booklet guides individuals over the course of 62 pages and through eight worksheets to determine how much they need to save monthly to retire in ten years. consumers must find over 100 pieces of data from other sources. TAKING THE MYSTERY OUT OF RETIREMENT PLANNING 47 (2006). & HUMAN DECISION PROCESSES 272 (1996). Poor Conditions for Debiasing Even if education could close the gulf between current consumer knowledge and skill levels and those needed to make welfare-enhancing decisions in today’s credit. predict rates of return so as to select growth and income conversion factors for each of their assets.

Yet even if financial education programs tried to reduce or eliminate decisionmaking biases. negative or threatening feelings experienced during that process. Neuroeconomics: How Neuroscience Can Inform Economics. California 1957). More elaborate models consider tangible resources spent on information search and processing. 43 J. households face a deluge of information and choices but also substantial ambiguity and uncertainty. REV. consumers tend automatically and subconsciously to minimize use of intangible cognitive and emotional resources. Jeff Sovern. ECON. Cf. the evidence on debiasing presented below indicates that such an attempt would have little effect. Telling More Than We Can Know. A Behavioral Model of Rational Choice. 231-32 (1977) (finding people cannot access their reasoning processes. nor evidence of much effort by educators to do so. Instead of weighing the cost of continuing discomfort against the cost of making a decision without evaluating all alternatives. & MARY L. A THEORY OF COGNITIVE DISSONANCE (Stanford. Antoine Bechara et al. 231. and by escaping situations that cause unpleasant feelings such as fear or embarrassment. 2. 26 (2005) (explaining people interpret their choices as the product of cognitive deliberation even when caused by automatic affective responses).J. they require tradeoffs between often incommensurable near and long term costs and benefits. 69 Q.. 47 WM. 1. biases.g.. The Prevalence of Biases in Personal Finance Decisionmaking Consumer financial decisions present a host of triggers for decisionmaking biases. 28.. 99 Willis. They fail to apply sufficient energy to inhibit visceral drives. 98 . 1997. at 754-59 (offering the intangible transaction costs schematic as integrating the heuristics. rather than engaging in deep cognitive processing. the emotional cost of considering one’s own mortality when choosing whether and how much life insurance to buy. i. To avoid much of the time. Financial choices are not merely about dollar figures. ECON. and can even deepen the effects of biases on the decision. E. Overwhelming Information and Choices. consumers often passively accept defaults or “free” (nonexpert) advice.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 16 people’s biases. Deciding Advantageously Before Knowing the Advantageous Strategy. The nonmonetary considerations involve aspects of life most of us would rather not think about. careful decisionmaking. SCIENCE. They minimize cognitive dissonance by ignoring contradictory information or misinterpreting that information as supportive of prior beliefs. 100 Cognitive dissonance is an uncomfortable feeling caused by holding two thoughts sensed to be logically inconsistent. Richard E. effortful. LEON FESTINGER. 101 See.g. Commonly. 99 (1955). 1635 (2006) (detailing ways in which sellers profit from imposing tangible transaction costs on consumers). but perceive their post-hoc constructions to be based on such access). Too many choices See generally Herbert A. REV. e. Even when motivated to try to engage in rational. 9. these attempts may be futile. They minimize the experience of negative emotions by avoiding or denying threats to self-esteem and ego. these decisions concern emotionally-charged high stakes.98 But “intangible transaction costs”99 are less frequently accounted for even though they powerfully influence decisions.. Towards a New Model of Consumer Protection: The Problem of Inflated Transaction Costs. at 1294 (providing evidence of affective somatic responses to stimuli before cognitive awareness of the stimuli). effort. 84 PSYCHOL. LIT. Nisbett & Timothy De Camp Wilson. and emotional coping decision theories developed by psychologists and economists). cognitive dissonance. The Intangible Transaction Costs Schematic Decisionmaking typically is conceived in terms of its outputs—the costs and benefits of the selected alternative.101 People minimize cognitive effort by relying on heuristics and allowing biases to simplify decisionmaking. Consumers today are drowning in financial choices and detailed information about every one of them. Feb.100 and energy required to inhibit visceral drives that might derail the process. and tangible benefits such as obtaining the best policy. for example. supra note__. These intangible costs include attention and effort spent on the process of decisionmaking. Cognitive and emotional resource outlays are usually invisible during decisionmaking. Colin Camerer et al. and unpleasantness of financial decisionmaking. Simon. When making these decisions. People do not make conscious tradeoffs between intangible expenses such as.

Status Quo Bias and the Number of Alternatives: An Empirical Illustration from the Mutual Fund Industry. 314 (1995)) (citing studies). consumers given information about 11 attributes of 6 investment fund choices felt there were too many options to consider. Iyengar et al. BEHAV. Even a small amount of information and a few choices can cause overload. in PENSION DESIGN AND STRUCTURE: NEW LESSONS FROM BEHAVIORAL FINANCE (Olivia Mitchell & Stephen Utkus. 56 MEDICAL CARE RES. The Irrelevance of Information Overload: An Analysis of Search and Disclosure. The Psychology of Doing Nothing: Forms of Decision Avoidance Result from Reason and Emotion. 57. 302 app. 6 J. 305. individuals may lack sufficient mental resources to consider all alternatives and relevant information. for reasons collectively called “information overload” and “choice overload. CAL. the consumer may not even attempt to use a rational decisionmaking strategy. Rationality as Process and as Product of Thought. & REV. however. Lepper.. ECON. Consumer Choice Among Health Insurance Options. eds. 996 (2000). 109 See. REV. In one experiment. McLaughlin. Asset Allocation and Information Overload: The Influence of Information Display. 108 Catherine G. Sheena S. and Investor Experience. and said it was a relief to make a decision. What’s Psychology Worth? A Field Experiment in the Consumer Credit Market 9 & 17 (Yale U. 7 J. 7 & 8 (2005). pushing some to move their allocations away from stock funds to low-risk low-return options. When Choice Is Demotivating: Can One Desire Too Much of a Good Thing?. David Mechanic. the quantity of information and number of products the average consumer must search through is daunting.”102 In personal finance decisions. Health Care Consumers: Choices and Constraints. stressful. when new employees were given a choice of 14 health plans. 13 (1978). As the authors conclude. FIN. 79 J. Julie R.. at 478 (emphasis in original) & 476-77. increasing the number of retirement investment fund choices can overwhelm employees. people routinely consider fewer than five attributes of each alternative. 138.. Grether et al. 204 (2006). the effect of simplifying by describing only a single alternative increased likelihood of 104 In borrowing to the same degree as a 2. BEHAV. 102 . REV. 8 HEALTH AFFS. e.3 percentage drop in monthly interest rates. 45 (1999) (citing source). 83 percent signed up for one of the two plans with the most well-known insurers. BULL. 105 Formisano et al. 75 percent of insureds reported considering only a single insurance company and nearly as many allowed the salesperson to select their policy for them. 277. An Exploratory Study of Choice Rules Favored for High-Stakes Decisions. 64-65 & Tbls.108 When selecting among the remaining alternatives. David M.g.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 17 and too much information may be as harmful as too few and too little. 59 S. 918 July 2005). and difficult. Kahn & Jonathan Baron.”105 Even when not deterred from decisionmaking.109 Yet to make welfare-enhancing personal finance decisions. R. 139 (2003). 995. See also Christopher J. Growth Ctr. consumers were more likely to borrow. buying life insurance. each of which offered dozens of basic policies and riders. 103 Sheena S. Econ. 142-43 (1989) (consumers make decisions about health care plans through focusing on only a subset of the dimensions of the plans). MARKETING RES. 2007) [hereinafter. Agnew & Lisa R. 104 Marianne Bertrand et al.g. and paralyzing others to the point that they are less likely to participate in their employer’s 401(k) plan at all. Information Load and Decision Quality: Some Contested Issues. Discussion Paper No. 14 J. 106 E. Simon. How much choice is too much?: Contributions to 401(k) Retirement Plans.. 569 (1977). Iyengar & M. Alexander Kempf & Stefan Ruenzi. For example. found the decision to be overwhelming. Anderson. people “chose not to engage in decision making. PERSONALITY & SOCIAL PSYCHOL.. Because the costs of complete information search and choice processing seem too high. one study found that households had hundreds of companies to choose from. 107 Barbara E. 24.107 One strategy is to focus on only the best-known alternatives. supra note__. 4 J..103 When advertising from a small loan lender described a single loan choice rather than a variety of loan sizes and term lengths. in addition to price. consumers must consider Herbert A. Jacob Jacoby. Asset Choice. CONSUMER PSYCHOL. L. 68 AM. faced with choice overload. between 1 and 3 attributes in making purchase decisions). PENSION DESIGN]. (1986) (listing studies showing consumers consider. Szykman. Faced with so many choices. 569. 1.106 People faced with more than three alternatives typically use simplified decision strategies to quickly narrow their choice set. 129 PSYCHOL. FIN.

23 J. MAXED OUT 24-25. REV. 1221 (2004). Deescalation Strategies: A Comparison of Techniques for Reducing Commitment to Losing Courses of Action. 2005) (finding higher levels of financial rewards consistently lowered performance on a broad range of experimental tasks requiring cognitive effort). e.114 When people anticipate receiving credit or blame for the outcome of a high stakes decision. Development of Scientific Reasoning Biases: Cognitive Versus Ego-Protective Explanations. SKEEL. 110 . supra note__. Kahn & Baron. 77 J. In addition. at 307. Reserve Bank of Boston. High Financial and Emotional Stakes. CREDIT CARD NATION 1618. AS WE FORGIVE OUR DEBTORS: BANKRUPTCY AND CONSUMER CREDIT IN AMERICA 8-9 (1989). trustworthiness. margins. 175. 419. American culture views financial decisions not merely as expressions of preferences but as signifiers of character traits such as responsibility.. 113 E. Decision Difficulty: Effects of Procedural and Outcome Accountability. while purchasing a home. 111 See. industry.112 High stakes. DAVID A. CONSUMER HANDBOOK ON ADJUSTABLE RATE MORTGAGES (Dec. and thereby decrease decision quality. Klaczynski & Gayathri Narasimham. income. SULLIVAN ET AL. without any BD. but also that consumers can obtain credit and insurance relatively easily and even reap stock market windfalls. 05-11. 424 (1992)... DEBT’S DOMINION—A HISTORY OF BANKRUPTCY LAW IN AMERICA 189-91 (2001). 114 E. CONSUMER RES. Econ. typically motivate people to expend more effort in a conscious attempt to engage in systematic rational processing. 32 J. TERESA A. SCURLOCK. Paul A.g. VIVIANA A. amassing wealth.113 Ironically. frugality. for Behav. enjoying a comfortable retirement. FINANCING THE AMERICAN DREAM: A CULTURAL HISTORY OF CONSUMER CREDIT 87-88 (1999). Of Predatory Lending and the Democratization of Credit: Preserving the Social Safety Net of Informality in Small-Loan Transactions. it could increase overload. however.111 The possibility of failure to meet financial expectations threatens a consumer’s ego. payment options. 115 Yinlong Zhang & Vikas Mittal. 1217.. 103-109 (2000). at 145-46. Large Stakes and Big Mistakes 5 & 19-21 (Fed. caps on rates and payments.g. etc.115 Why? Prior to the reasoning process. MANNING. negative amortization. 34 DEVELOPMENTAL PSYCHOL..”110 Even if a consumer understood these attributes.. RES. Minimal substantive regulation means that a wrong guess about future medical expenses. ARM HANDBOOK]. discounts. EXPERIMENTAL PSYCHOL: LEARNING. Choice Processing in Emotionally Difficult Decisions. and recasting (recalculating) your loan. The Federal Reserve’s Handbook on Adjustable Rate Mortgages instructs: “To compare two ARMs with each other or to compare an ARM with a fixed-rate mortgage. & Decision-Making Working Paper No.g. they are too numerous to make tradeoffs among them. emotions or the “affect heuristic” can exert great and often subconscious power over preferences. Consumers often consider not only their own future welfare but also family or household members for whose welfare they feel responsible or will be held accountable. ZELIZER.. ROBERT D. 185 (1998) (finding increased accuracy goals led to superior justifications. Regina Austin. To the extent that financial education gives consumers even more information and choices. 53 AM. When financial success and failure are equated with character. THE SOCIAL MEANING OF MONEY 148 (1994). 112 Baumeister. whether positive or negative. Ctr. 469 (2005). Financial choices pose the potential for significant negative and significant positive material and emotional outcomes. APPLIED PSYCHOL. L. high motivation and effort also frequently result in worse performance. Dan Ariely et al. OF GOVERNORS OF THE FED. the former can lead to ego boosts and positive emotions. self-control. Res. but no decrease in cognitive biases). you need to know about indexes.. they find the decision more difficult and are more likely to engage in a losing course of action. life span. supra note__.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 18 many attributes and a great deal of information. LENDOL CALDER. ii. 465. Itmar Simonson & Barry M. July 23. Staw. JAMES D. MEMORY & COGNITION 384 (1997). and passing on that wealth to future generations are all culturally esteemed. could land the consumer in serious financial trouble. Luce et al. and wisdom. and the latter to ego threats and negative emotions. U. 93 (2007). 2006) [hereinafter. consumers may feel the weight of social judgment of their financial behavior.

PERSONALITY & SOC. so don’t be surprised if it’s emotionally draining. People with an initial inclination toward a particular choice. 51 (2001). 642 (1987).”117 Fear of accountability for poor outcomes can be distressing. 117 Dieter Brunner. acting quickly rather than gathering all of the necessary information for making the decision well. 52 J.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 19 cognitive mediation. 71 J. but relatively insensitive to probability changes in gambles for a painful electric shock (high and emotionally-charged stakes). they will not merely weigh these against expected costs but truly will perceive the costs and the probabilities of those costs to be lower. About ScenarioNow. J. PERSONALITY & SOC. 12 PSYCHOL. 1250.123 On the other hand. stressful thoughts can lead people to ignore probabilities and consider only potential costs. 124 Slovic et al. the positive vision of homeownership could lead households E.com. Risk. 314-15 (2004). If they are focused on potential benefits. 118 Aaron L.. and How to Avoid Them. Risk As Analysis and Risk As Feelings: Some Thoughts About Affect. Brownstein. 119 Baumeister. focusing on only a few salient. the positive or negative valence of which will depend on whether the feelings aroused by potential costs or by potential benefits dominate. Decision Making Under Stress: Scanning of Alternatives Under Controllable and Uncontrollable Threats. the consumer must take mental shortcuts. at 148. Why Do Bad Moods Increase Self-Defeating Behavior? Emotion. 185. 1264 (1996). Unconscious processing of information can avoid these negative feelings by biasing evaluations of alternatives in favor of the one that is chosen. embarrassment. and immediate dimensions of the decision. supra note__. Brownstein. A former home loan officer explains “Be ready for an emotional roller coaster.119 Marketers play to these emotional responses. focusing on potential positive outcomes of financial decisions can lead to wishful thinking or irrational exuberance. See also. particularly when they feel that potential negative consequences of a poor decision are high. BULL.”120 Indirectly. reducing those available for financial decisionmaking. 116 . It really is true that your mortgage will probably be the most expensive transaction of your lifetime. would dictate a different result..124 For example. at 565. available at http://www. Yuval Rottenstreich & Christopher K. at 315-16. 188 (May 2001).com/aboutretirenow/aboutsn.htm. tangible. 120 ScenarioNow. Financial Calculators. 2006). supra note__.. SCI. supra note__. CUVillage. Paul Slovic et al.g. e. and Electric Shocks: On the Affective Psychology of Risk. Hsee.cuvillage. CONSUMERAFFAIRS.. 123 Subjects in one experiment were sensitive to probability changes in gambles for small dollar amounts (low stakes). will search for new data and reinterpret existing data as favoring that choice and disfavoring alternatives. 639. Biased Predecision Processing.com/files/cucorp/904/file/pdf/products/enhancements/calculators-spreads.com. 121 Giora Keinan. PSYCHOL. and Rationality. stress can occupy cognitive resources. “painlessly. benefits.118 Another mechanism used to cope with these negative feelings is to truncate the decision process. Andrew Caplin & Jonathan Leahy. 545.” and even. once probabilities are taken into consideration.g. 116 Q. 561 & 564 (2003). Reason. ECON.121 With less capacity to handle the task at hand. People tend to confuse their emotional response to the choice presented with a cognitive appraisal of underlying costs. The Mistakes Borrowers Make. Over the course of the decisionmaking process positive and negative affective responses can see-saw. Risk Taking. available at http://cuvsolutions.COM (June 6. Kisses. meaning that they will avoid a low probability high cost alternative even when the expected value of other alternatives. 122 Karen Pezza Leith & Roy F. Psychological Expected Utility Theory and Anticipatory Feelings.scenarionow.122 Although personal financial decisionmaking requires assessing not only the costs and benefits but also the probabilities of decision outcomes. provoking anger.pdf. 24 RISK ANALYSIS 311. Money. Baumeister. one software program developed by a psychologist claims. 129 PSYCHOL. PSYCHOL.116 A consumer facing a high stakes personal finance decision is likely to have an affective response. personal finance software programs advertise that they will help consumers make financial decisions “quickly and easily. and Self-Regulation. or frustration. and risks.

2003) (finding retirement financial education produces anxiety and stress). e. In one longitudinal study. Families on average report about a third as much credit card debt as issuers.128 Contemplating these facts of life can bias decisionmaking.125 Likewise.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 20 to home purchase and mortgage choices with expected costs that. protected values that people resist commodifying. 128 See. capacity for decisionmaking is reduced. Bounded Rationality. These decisions demand tradeoffs between money and life or health. 127 See Andrew Caplin & Jonathan Leahy. similar to the negative feelings that can be triggered by high stakes decisionmaking. but they want to believe so much that they participate knowing they most likely will lose. consumers regularly engage in “debt denial. Swindles. and even death. REV. 1203 (Fall 2003). Even those who reported a high expectation of job loss appeared to be in simultaneous denial of that expectation—they did not reduce their household food consumption when they knew Willis. L.g. Why We Lie About Money and Debt. about one-third of workers who lost their jobs had previously reported a zero expected probability of job loss.. To come to rational decisions about how much debt to take on.129 Households at risk for severe declines in living standards upon the death of a wage-earner might find a lack of this insurance particularly stressful. Because the negative feelings occupy attention. outweigh expected benefits.”126 Ironically. and potential costs of these personal risks. 2005). As a Better Business Bureau officer explains: “Consumers often know it’s a scam. Discomforting Thoughts. illness. at the expense of making a good decision. 126 125 . REV. DEMOS (Sept. yet are the least likely to have it. 2003). Russell Korobkin. Personal finance decisions require recognizing susceptibility to misfortune.130 Of particular relevance to financial decisions is whether people are accurate in their expectations about their prospects of future employment and income. it exacerbates this problem. at 149-50. 354. Douglas Bernheim et al. Thinking about unpleasant facts can bias decisionmaking by inducing fear or anxiety. Jeff Langenderfer & Terence A. some consumers appear to engage in denial. what kind of insurance to buy. To the extent that financial literacy education draws attention to the stakes involved. topics most people would rather avoid. the very stakes that motivate consumers to try to engage in good financial decisionmaking can prevent them from reaching welfare-enhancing decisions. but issuer data puts the proportion closer to 40%. eds. To avoid the fear and anxiety produced by contemplation of the unpleasant facts of life. 93 AM. Borrowing to Make Ends Meet: The Growth of Credit Card Debt in the ‘90s. in 1 THE PSYCHOLOGY OF ECONOMIC DECISIONS: RATIONALITY AND WELL-BEING 73.” understating their credit card debts. and Fraud: A New Theory of Visceral Influences on Persuasion. 18 PSYCHOL. Nearly half of all U. 763. a positive affective response to imagined wealth could lead to mentally downplaying costs and risks and land the consumer in a fraudulent financial scheme. People at times escape the bad feelings by truncating the decision process to end it quickly. aging. Shimp. They’re thinking so much about the prize.COM (Apr.S. ECON. 130 For example. about 60% claim they pay off their credit card balances in full every month. timing. Carillo. The Mismatch Between Life Insurance Holdings and Financial Vulnerabilities: Evidence from the Health and Retirement Study.127 iii. Consumer Vulnerability to Scams. 775 (2001). These families most need to have life insurance. & MKTG. BANKRATE. but so too can the psychological mechanisms used to avoid contemplating these facts. 79-85 (Isabelle Brocas & Juan D. 129 B. neutrally appraised. For example. and Unconscionablity. avoiding thoughts about death appears to contribute to inadequate purchase of life insurance. 70 U. For example. Standard Form Contracts. supra note__. they don’t consider that you shouldn’t have to pay [up front] to get it. Behavioral Policy. and how much to save for retirement. Larry Getlen. 360-61 (2003). households have not purchased life insurance and think they should or have purchased life insurance but think they should buy more. when asked in anonymous surveys about their finances. Tamara Draut & Javier Silva. consumers must assess the probabilities.. CHI.

139 Overconfidence probably plays a role in the persistence of high penalty credit card fees. 136 E. assuming these warnings are for others.” “you could lose your home. the use of this education as a policy tool is premised on the idea that consumers Melvin Stephens. Langer. Weinstein & William M. in THE IMPACT OF PUBLIC POLICY ON CONSUMER CREDIT 109.. believing that the information gives them more knowledge even when it does not. such as the way they throw the dice or the lottery card they choose. The Demographics of Overconfidence. Gokul Bahndari & Richard Deaves. 355.g. FIN. Two Steps Forward. 131 . Vitt.136 Although many financial products in the U. 138 Thomas A.135 Overoptimism and overconfidence in personal finance decisionmaking is widespread. come with disclosures about risks—e. if you do not meet your obligations under the loan”137— consumers routinely ignore warnings that are not obviously tailored to their own situation. supra note__.”). 134 Paul Slovic et al. However. Job Loss Expectations.138 Insufficient retirement savings also appears to be the product of overoptimism about health and ability to earn income during retirement and denial about the probability of illness and of needing long-term care. ECON. Barber & Terrance Odean.1 (2006) (quoting Frontline television program.133 Although education might increase the accuracy of their knowledge about the actuarial probabilities of negative life events. & STATISTICS 253 (2006).. 132 Neil D.. individuals frequently will continue to believe their own odds are better so as to minimize thoughts of their personal vulnerability. they become overconfident in their ability to invest well. Weinstein. Durkin & Michael E. 2003)). BEHAV. FIN. Consumers’ Financial Decisions and the Psychology of Values. Durkin & Gregory Elliehausen. 55 J. eds. 6 (2006). 7 J. One Step Back: The Dynamics of Learning and Backsliding 2 n. a pervasive bias.131 This denial might help explain why borrowers agree to unaffordable loans. Staten. consumers can avoid fear and anxiety when contemplating objectively unpleasant facts of life by perceiving personal risk overoptimistically. The Internet and the Investor. supra note__. SERV. in JUU. ECON. 2002) (generic disclosures “might add little to general awareness . Even when faced with a game of pure luck. supra note__.. 231 & 236-37.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 21 their job loss probability was high. “past performance is no guarantee of future results. See Willis. in ENCYCLOPEDIA OF RETIREMENT AND FINANCE (Lois A. 14 HEALTH PSYCHOL. Gerlinde Fellner et al. internal quotation marks omitted). Competition does not drive fees down in part because “[m]ost people never anticipate they will pay late.”140 Effective financial literacy education must therefore reduce consumers’ overoptimism and their illusion of an unrealistic degree of control over their lives. PERSPECTIVES 41 (2001). people often perceive some element of control. for example.S. 86 REV. & ORG. 132-33 (1995). Resistance of Personal Risk Perceptions to Debiasing Interventions.. 135 Brad M. at 19. and Household Consumption Behavior. Consumers fail to save enough for retirement in part because they are overoptimistic about the future performance of their investments and because they have the illusion that they can control their rate of return through savvy investment strategies. Retirement Preparedness.. J. PROFESSIONALS 68. but waited until they had lost their jobs to do so. 140 Sumit Agarwal et al. 127 (Thomas A. 2004) (citing Mathew Greenwald & Associates. Jr. and any money you have put into it. 139 Lois A. Vitt.. 46870. at 224-29 (Appendix). Klein. ed. Disclosure as a Consumer Protection. at 463. supra note__. at 230.g. BEHAV. in JUU. so they do not shop around for better late fees. 133 Ellen J. 137 This disclosure is under the Home Ownership and Equity Protection Act of 1994 (HOEPA). Alternatively. 69-70 (Nov. 372 (2004). Facts Versus Fears: Understanding Perceived Risk.. when a more realistic assessment of income prospects would lead to less debt.134 Giving consumers more information through financial education may only produce the “illusion of knowledge. 132. Realizations. ECON. The Illusion of Control.132 People maintain overoptimism about their own susceptibility to risks through overconfidence or illusions as to the degree to which they can control whether these risks befall them. Illusion of Expertise in Portfolio Decisions: an Experimental Approach. 5.” When consumers are given more information about investments. 15 J. consumers already have.

58.” their 141 sense of self-efficacy in controlling their own financial condition. 142 See. regardless of time or uncertainty households are likely to place the same value on homeownership. 64 (1979).142 Contingencies that are farther out in the future. making all uses of credit ripe for time bias. iv. income. Further.143 Time and uncertainty can be conceptualized as decreasing the weight put on an outcome by making the current imaginings of the outcome murkier. and accounting for uncertainty—uncertainty about future medical expenses. e.. decisions about near-term. but lowerlevel concrete details are weighted more strongly when made more immediate and certain. disability. AND THE HUMAN BRAIN xii-xiii (1994). 112 Q. whereas they are unlikely to attend as carefully to a change in the amount of a monthly loan payment if that change is not happening anytime soon or the amount of the change is uncertain (an ARM). at 83-87. LETTERS 5. 6 J. aspects construed at a high or abstract level are little affected.. Consumer decisions about credit are easily influenced by time and certainty effects.144 Not all future or uncertain consequences of decisions are equally affected by this phenomenon. ECON. J. Slovic et al. LIT. to a significant extent. 141 . Personal finance decisions must be made despite. 121 (1999). 147 Drazen Prelec & Duncan Simester. Time bias correspondingly may reflect discounting or myopia. an abstract feature of a home loan. Stokes & Sharon Polansky. Financial literacy programs are deemed a success when they strengthen participants’ “internal locus of control. borrowers often do not examine the feasibility of paying a higher monthly amount when the teaser expires. 360 (2002) (reviewing literature). CONSUMER PSYCHOL. People typically must mentally visualize and emotionally experience a future contingency to give it weight in their decisions. supra note__. Unfortunately. 12 MKTG. Time Discounting and Time Preferences: A Critical Review. DESCARTES’ ERROR: EMOTION. and certainty bias may reflect ambiguity discounting or certainty preference. at 20-22 (calling this the “certainty effect”). Differences in Consumer Purchase Behavior by Credit Card Payment System. Paradoxically. Elizabeth C. control their financial situation. As a consequence. many think they will refinance or switch cards as soon as the teaser ends because when they obtain the credit the logistical costs of refinancing or switching in the future are discounted. decisions laced with future uncertainty are particularly likely to trigger biases. or immediacy and certainty can be seen as increasing the weight put on an outcome by making the current imaginings more vivid. REASON. When it comes time to Pamela P. Anything bought on credit is an immediate benefit. THOMAS J. 351. passim (2007).146 Consumers therefore will pay higher prices and spend more overall using credit cards than when paying with cash.. COTTLE & STEPHEN L. and Behavior. supra note__. Hirschman.. CONSUMER RES. certain events are judged by tangible aspects such as feasibility. 89-90 & 93. 8 (2001). inflation. Always Leave Home Without It: A Further Investigation of the CreditCard Effect on Willingness to Pay. Prediction. 83. supra note__. Uncertainty and the Future. 3 ACADEMIC ACCTG. KLINEBERG. and therefore influence decisions less strongly than those that are immediate and certain. 461-65 (1997).147 The pricing mechanisms used for credit products also capitalize on these biases. returns on investments. life span. Golden Eggs and Hyperbolic Discounting. DAMASIO.145 For example. Construal Levels and Psychological Distance: Effects on Representation. because of. Shifting the Economic Locus of Control: Improving Financial Decision-Making in High Risk Populations. or more uncertain. financial literacy programs may increase overoptimism about financial risks in the course of educating people about these risks. 443. ANTIONIO R. 145 Trope et al.g. etc. 146 David Laibson. and the costs of payment are always in the future.J. Evaluation. 116. THE PRESENT OF THINGS FUTURE 13-35 (1974). Teaser rates on mortgage loans and credit cards are profitable for lenders in part because when taking on the debt. 144 See Shane Frederick et al. STUDS. ECON. Tversky & Kahneman. 40 J. J. 143 See Yaacov Trope et al. FIN. can be less vividly brought to mind. at 314.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 22 can. whereas events that are either long-term or uncertain are judged by the desirability of the broad-brush outcome..

these costs loom large. family and health status. leading to delay. Time and uncertainty biases undoubtedly contribute to inadequate insurance coverage as well. Influence of Future Time Perspective. supra note__(finding standards of living decline unexpectedly after retirement). however..149 Prepayment penalties. Mowen. when the benefits are farthest away and the most uncertain. 693 (Dec. Douglas A.148 When future costs are uncertain. 14.151 Consumers are aware of the importance of retirement planning but “may procrastinate on investing for retirement exactly because it is one of the most important life decisions. The Discounting of Ambiguous Information in Economic Decision Making..WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 23 refinance or switch. 153 Olivia Mitchell & Stephen Utkus. 8 J. Joy M Jacobs-Lawson & Douglas A Hershey. They cut up their credit cards and use automatic withdrawals for retirement plans.g. a consumer must forecast the future. as with a teaser ARM tied to an index. 2000) (finding time bias leads to procrastination of retirement planning). late fees. They maintain mental accounts. Your Mortgage: Prepayment Penalty a Surprise.g. TIMES. POL'Y ANALYSIS & MGMT. DEC. Premium payments are certain and immediate. 578 (1989). 331. 14 FIN. the uncertainty bias might heighten to this effect. To plan. Financial Knowledge. Procrastination in Preparing for Retirement. in BEHAVIORAL DIMENSIONS OF RETIREMENT ECONOMICS 125 (Henry Aaron ed. Eric Van Dijk & Marcel Zeelenberg. supra note__ at 3. 40 GERONTOLOGIST 687. at 141-42.”152 Given its importance. see also Colin F. e. Hershey & John C. shelter. BANKING & FIN.154 Educating consumers about these biases is unlikely to help. 149 See. Jack Guttentag. MAKING 341. uncertain future costs at the time of mortgage or credit card selection. tax rates. 148 .. supra note__. See. but bear the costs of these in the present while the tangible benefits are in the future. 339 (2005) (finding time perspective influences financial planning more strongly than financial knowledge). Oct. near-term costs and benefits. people should save for retirement early. over-the-limit fees. 2001. setting (but not always following) rules allowing themselves to spend only current income. 150 E. 16 J. Calem et al. and have developed numerous self-control mechanisms to counteract them. not credit. supra note__. REV. Consumers are aware of their susceptibility these biases. and health care will cost per month after retirement.. They support mandatory insurance coverage laws and accept mortgage lender insurance conditions. BEHAV. 565. 1684 (2006). tend to base their decisions on premium prices and provider availability. for Given that credit card offers choke residential mailboxes. SERVS. but many of them go to feasibility questions such as how much food. probably do not register any weight on decisionmaking about entering into loan contracts.150 Time and uncertainty biases partly account for failure to plan and save adequately for retirement. and longevity. including “lifetime earnings. even among consumers who know a fair amount about financial planning. 151 Bernheim et al.A. in PENSION DESIGN. Psychological Determinants of Financial Preparedness for Retirement. 154 Mechanic. 1999) (italics in original). rather than uncertain future health needs. Lessons from Behavioral Finance for Retirement Plan Design. at 31 (credit card penalty fees). from the consumer’s perspective. GAO.. 1653. consumers experience surprising costs in switching to a new card.. 152 Ted O’Donoghue & Matthew Rabin. L. e. These uncertain future logistical matters are particularly difficult to imagine and account for in the present. at K5 (mortgage prepayment penalty fees). For example. 348 (2003). unless they have existing health needs. To take advantage of compounding. Switching Costs and Adverse Selection in the Market for Credit Cards: New Evidence. future expenses that are. Decision Processes for Low Probability Events: Policy Implications.g. 5. consumers selecting health insurance plans. and finance charges. and Financial Risk Tolerance on Retirement Saving Behaviors.”153 Not only are these uncertain. Paul S. whereas the benefits of coverage for insured events are uncertain and delayed. asset returns. consumers believe they should spend significant resources on planning and saving for retirement. CREDIT CARDS. 30 J. Camerer & Howard Kunreuther.

161 Frank R. SCI. a borrower might compare monthly payment amounts and APRs of mortgage options. 5 PSYCHOL. they frequently. some with incommensurate features. along every dimension about which the consumer lacks preexisting preferences. NATIONAL HOUSING SURVEY 2001. albeit unconsciously. in that aspects of a decision that are easier to evaluate. The Evaluability Hypothesis: An Explanation for Preference Reversals Between Joint and Separate Evaluations of Alternatives. at 786. relative to the alternatives presented. The evaluability bias156 operates similarly to time and uncertainty biases. weigh more heavily in the decision than less evaluable—even if more important—aspects. FINANCE 1593. 786 (2006). 197-98 (2000).162 This “omission neglect” bias is less likely when the consumer knows the product type well and the decision context provides reference points that highlight the missing information. MKTG RES. MAKING 183. 189.163 But consumers are rarely knowledgeable about financial products.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 24 nondurables. 16 J.. including their own emotional responses.159 In one experiment. Hsee. About a third of all home loan borrowers in a national survey said their lender presented them with only a single loan option. 1594-95 (2002). 255-56 (1996). Markman. Dedre Gentner & Arthur B. CONSUMER PSYCHOL. Itmar Simonson & Amos Tversky. Choice in Context: Tradeoff Contrast and Extremeness Aversion. 282 (1992). 156 Christopher K. Structural Alignment in Comparison: No Difference Without Similarity. 164 FANNIE MAE. 59 J. Kardes et al. but is not financial literacy education. analytically or emotionally. 160 Shlomo Benartzi & Richard H. For example. the heuristic can lead consumers to confuse outcomes with probabilities. Debiasing Omission Neglect. 184 (1999). Similarly.161 Although insureds report that quality of healthcare is paramount in selecting a health plan. will neglect that fact. RES. 67 ORG. Financial products can be difficult for consumers to evaluate. 29 J. DEC. 163 Kardes.158 For example. 12 J. few look beyond the promotional materials they receive to consult quality ratings from a neutral source. consumers frequently rely on the information handed to them in forming their assessment of a product. 281. 152 (1994). supra note__. supra note__. and sellers hide cues that would call attention to omitted information. Amar Cheema & Dilip Soman. CONSUMER PSYCHOL. Mental Accounting Matters.157 Where people have multiple options. supra note__. BEHAV.160 Decisions using this strategy depend on where each alternative falls within the consumer’s choice set. Even when they know which information they should use and aim to make their decisions based on it. v. the affect heuristic evoked by high stakes is an evaluability bias in that an affective response creates an instantaneous evaluation. at 46.155 Creating more and stronger precommitment devices could be helpful. Thaler. Another strategy to avoid difficult comparisons is to select the alternative that appears average. PROCESSES 247. BEHAV. might ignore that feature rather than calculating its worth in a common currency with monthly payment and APR. 157 Id. at 6 (2002). 158 See Brownstein. 162 McLaughlin. BUS. Decision strategies that avoid tradeoffs among incommensurable features of financial products reflect an evaluability bias. & HUMAN DEC.. Trying Hard or Hardly Trying: An Analysis of Context Effects on Choice.164 155 Richard H. 57 J. How Much Is Investor Autonomy Worth?. . 33. 786. at 555 (citing sources). Opaque Attributes and Incommensurate Tradeoffs. but if only one has a prepayment penalty. 9 J. and if key information is missing. subjects choosing among three retirement investments with given associated risk levels tended to select the middle-ranked option. Malleable Mental Accounting: The Effect of Flexibility on the Justification of Attractive Spending and Consumption Decisions. focus instead on that which is the easiest to evaluate. Thaler. skewing expected value calculations necessary for good financial decisions. without decisionmaker effort. 159 Ravi Dhar et al. 42 (2006). a common response is to avoid trading off incommensurables by ignoring alternatives or features that would require tradeoffs. As explained above. regardless of absolute risk level or which investments were presented.

2006). Christopher K. The more mentally available a piece of information is. Although the fees associated with investments should be weighted as heavily. A sheriff placing the former homeowner’s belongings on the street would catch attention. 170 Tversky & Kahneman. The classic demonstration of the availability heuristic is in the personal finance realm. When consumers living in floodplains decide whether to purchase flood insurance. Consumers chase investment returns in part because they believe past performance is representative of future performance. the greater weight put on it in decisionmaking. 165 . Hsee & Howard C. abstract. Foreclosure Numbers: A Guide for the Perplexed. The more mentally available an event is.166 This bias likely also contributes to consumer failure to appreciate financial product risks that are not mentally available. Choi et al. Experience can lull consumers into a false sense of security when they assume their knowledge of an earlier See generally Amos Tversky & Daniel Kahneman. one product is taken to be representative of another along more than the dimensions they share. and remote—they often ignore that data in favor of making judgments based on the mental “availability” of an event. at 20. Miller.”165 When events. The unsurprising result is that active consumer investors chase returns. the more probable it seems. 154 (2000) (availability and judgments about costs). either by deed-in-lieu of foreclosure or short sale. costs. Availability: A Heuristic for Judging Frequency and Probability. Historical returns data are prominent in investment fund prospectuses. or received frequently. Another evaluation shortcut is the representativeness heuristic. 169 James J. which varied based only on the lifespan of the fund) in a salient manner (on a single. Even when consumers have the numerical knowledge and skills to use statistical data— which seems dry. regardless of how many times they are told otherwise. in JUU 163. the larger it seems. 168 See Mitchell & Utkus. supra note__.(availability and probability judgments). 166 Id.171 The representativeness heuristic can make experience a poor teacher. 167 Many consumers avoid foreclosure altogether. With the low availability of images of foreclosure within the minds of most consumers.170 That is.169 Yet giving the students irrelevant information (each fund’s returns since inception.aspx?&ItemID=2909&accnt=64953. if not more. in JUU supra note__.167 Because poor credit outcomes are viewed as the product of bad character. even when important features differ. Why Does the Law of One Price Fail? 16 (NBER Working Paper No. Kunreuther. Introduction. the paperwork of the foreclosure process does not lend itself to dramatic photographs or video footage. RISK & UNCERTAINTY 141-42. Consumers tend to judge unfamiliar products based on their similarity to familiar products. See Peter G. consumers who have lost their homes to foreclosure generally avoid advertising that fact. separate piece of paper) increased the average weight returns data had on their decisions. they are more strongly influenced by personal experience than by objective information about the probability and costs of a future flood.realtytrac. fees are buried in the fine print. they are more easily brought to mind.com/ContentManagement/RealtyTracLibrary. they consistently ranked fees as the most important factor in their decision. recently. 174-75.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 25 A related decisionmaking shortcut is the “availability heuristic. available at http://www. They were unable to ignore visually prominent information they knew was irrelevant. than past returns. particularly in a quickly-changing market. at 4-7. Although news stories report on high mortgage default rates. or with vividness or strong emotion. The availability heuristic is routinely exploited by sellers of financial products. 171 See Mitchell & Utkus. 20 J. at 20-23. supra note__. but virtually no consumers stay in the home long enough for this to happen. The more mentally available a cost or benefit is. they are likely to underestimate the risk and costs of foreclosure at the time they take the loan. and information are experienced. 12261.168 In an experiment in which MBA students chose among several index funds. The Affect Effect in Insurance Decisions. benefits.. observed.

Consumers might estimate the probability of not job loss. They already know that making these tradeoffs is preferable—in one survey. “losing one’s job” could be too vague to bring an available image to mind. Failing to account for every factor that could derail forecasts has been called the planning fallacy.179 vi.R. They want to make tradeoffs among incommensurate traits and to pay adequate consideration to traits that are difficult to evaluate. Bland et al.”173 When lenders engaged in credit rationing this assumption was reasonable because creditors made loans based on projections that borrowers could afford payments. that is no longer true now that today’s lending models. Truth in Lending. As consumers are slowly discovering. and therefore a consumer might underestimate its probability.177 This subadditivity effect can derail good personal finance decisions because many—how much debt to incur. Consumers might try to account for other causes of job loss by increasing their probability estimate somewhat. even when conditions have changed or the 172 Stacy L.—are based in large part on forecasts about income and employment. J. 173 Federal Reserve System. Koehler.” Consumers are not forced to make many of their own financial decisions. larger figure. Fox & R. although in experiments the summed probabilities tend to be more accurate.172 For example. 159–73 (2002). because of factory closure. many believe “that a lender would not provide credit to a consumer who did not have the capacity to repay. 1672. Prior Knowledge and Complacency in New Product Learning. how much to save for retirement this month. . so that their assessed probabilities sum to a more accurate. but rather the most likely cause of job loss. 29 J. Consumers do not want to evaluate choices based on inaccurate predictions. 549-50 (1994). 177 Kahneman & Tversky. can price default risk.”175 For example. The status quo and anchoring biases are tendencies to stay with whatever the status quo or initial “anchor” position is. called the “subadditivity effect. Intuitive Prediction: Biases and Corrective Procedures. etc.. The Passivity Alternative: Defaults and “Experts.—can increase probability assessments of each. Students And Bankruptcy Filers On Causes Of Financial Distress. Whether the single event estimate or the sum of subevents estimates is more accurate is indeterminate from the theory. Wood & John G. 5 J.174 Use of the availability and representativeness heuristics can result in estimating the frequency of an event to be lower than the sum of the frequencies of components. 178 Dhar et al. Support Theory: A Nonextentional Representation of Subjective Probability. 61 percent of Americans said that it is important to comparison shop for insurance—but find themselves unable to do so in practice—only 39 percent of respondents said they did so. 415. supra note__. etc. will be unlikely to adjust their estimates enough to account for all causes. Eugene M. and biases in advisor selection and advice acceptance. Proposed Rule. 2008) (mortgage lenders). 175 Amos Tversky & D. 101 PSYCHOL.. Id. 73 F.. RES. 1687 (Jan. 26 LAW & HUMAN BEHAV.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 26 product applies to a new product of the same type. Jr. REV. at 415. how much to save for a rainy day. supra note__.176 The representativeness heuristic could also cause subadditivity. with varying degrees of success. and so must first overcome inertia and passivity to even begin to engage in financial planning. 176 Cf. omission or inertia bias. Birke. 417 (2002). 547. 179 Getlen.178 Educating consumers that they should use healthcare quality ratings or a cost/benefit strategy would not debias them. supra note__. CONSUMER RES. at 414. supra note__. and then extrapolate this as representative of the broader category of job loss. discussed below. A number of biases are at work here: status quo and anchoring biases. Daniel Kahneman & Amos Tversky. 174 See Willis. in JUU. The detail in the mental picture of component events that could cause job loss—losing one’s job because of becoming disabled. Forecasting Trial Outcomes: Lawyers Assign Higher Probability to Possibilities that Are Described in Greater Detail. BUS. Lynch. & ECON. 416. Craig R. 53. 9. at 720-21. 56 (2007) (credit card issuers). supra note85. but due to anchoring effects.

In New Jersey the default was the new plan.181 Over a ten-year period. supra note__. Regardless of whether the employer’s default contribution rate is 2 percent or 6 percent. at 45 (citing source). Of course.185 Why do consumers stay with a status quo that is no longer—or never was—the best option for them? Beyond choice overload and procrastination resulting from time biases described above. 187 See.. 138. when faced with a difficult decision involving specialized knowledge. consumers who are uncertain whether changes would improve their finances may stick with the status quo to avoid blame for any poor outcomes.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 27 decisionmaker’s own needs would dictate a position far from the anchor. they are unlikely to change that allocation. Judgment Under Uncertainty: Heuristics and Biases. The omission or inertia bias.182 The same is true for investment allocations in retirement plans. who have a large number of health plans to choose from. Using Credible Advice to Overcome Framing Effects. 183 Mitchell & Utkus. 83 (2004). ECON. 184 E. 7 J.L. at 313 Fig. Once consumers initially choose a plan. will exonerate them from staying with the default. See Zvi Bodie. in THE PENSION CHALLENGE 19 (Olivia S. 1128-30 (1974). and Insurance Decisions. Over 80 percent of New Jersey residents “selected” the new plan. 186 Jonathan Baron & Ilana Ritov. Consumer Choice Among Health Insurance Options. and Normality. supra note__. James N.183 Even when making an initial “decision. and in Pennsylvania it was the old plan.180 Consumer “decisions” about health care plans. 11. The classic study here is of auto insurance: New Jersey and Pennsylvania both gave their residents a choice between the type of auto insurance plan already on the market and a new type that had lower rates and limited the insured’s right to sue. Omission Bias.J. Probability Distortions. 182 McLaughlin. the old employees often stay at the old default and the new employees accept the new default. a majority of employee contributions appear to mirror the default rate. Johnson et al.g. however. at 11.2. 8 HEALTH AFFS. but 75 percent of Pennsylvanians “selected” the old plan. they are very unlikely to change. Once employees make an initial allocation between stock funds and bond or money market funds. Consumer passivity is abetted by the market participants who have an interest in deciding how consumers should arrange their financial affairs. Mitchell & Kent Smetters. regardless of changes in their health care needs that would make switching to another plan beneficial. An Analysis of Investment Advice to Retirement Plan Participants. supra note__. & ORG. 62. despite widespread advice to shift from higher to lower risk investments as retirement draws near. This advice is not uniformly endorsed. Druckman. & HUMAN DECISION PROCESSES 74. but simply accepted the default. e. when companies change their defaults for new employees. 138 (1989).” people frequently accept options chosen by others. for example. 180 . RISK & UNCERTAINTY 35 (1993). 185 SCIENCE 1124. Individual Differences. 94 ORG.. a tendency to judge the quality and morality of actions but not to pass judgment on failures to act. consumers have difficulty selecting advisors possessing sufficient Kahneman & Tversky.. Framing. When the advisor employs the necessary expertise and acts in the consumer’s best interests.184 Retirement fund decisions follow a similar pattern. eds. BEHAV. 185 Choi et al. appear to be strongly affected by these biases. 181 David Mechanic. a normally quite appropriate response is to seek advice from an expert. relying on the advisor to make the decision can reduce the effects of the consumer’s biases on the decision. available in thought. and therefore likely to be judged.187 Unfortunately. 2003). in that many employees keep whatever contribution level and allocation the plan sponsor set as a default. evidence that many people did not select their plan at all. whereas omissions are not salient and are ignored. 17 J. only 15 percent of federal government employees. report even considering changing plans. 77 (2001). This does not reflect differences in retirement needs.186 Actions are salient.

REV. Among other things. Bad Products. & Urban Affairs. at 6 & n. 39 J. Once a consumer selects an advisor. When stakes are low. Professor of Law. Without independent advice. they favor the advice of a qualified expert. (Lose Your House Later. Erase Debt Now. Oct 10. officer. Housing. 15 J. on Banking. Jackson. they chose the former for a less important decision and the latter for the more important decision. 2001).” Linguistic conventions contribute to role confusion: the broker. 190 Lee & Cho. INFLUENCE: SCIENCE AND PRACTICE 20-50 (4th ed. Before the S.” or “my agent” even without any fiduciary duty to the consumer. yield spread premiums for selling consumers higher cost mortgages than that for which they qualify192 and soft-dollar payments to investment brokers for favoring particular funds193 can place the financial interests of mortgage and investment brokers at odds with their clients. before implementing an expert’s advice.189 Consumers fail to employ expert financial advisors for more tangible reasons as well.).” “my loan officer. at 117. Comm. not everyone has the resources to hire or enough money at stake to warrant hiring a financial advisor. rather than “selling” the financial product. 1209 & nn.191 This “free” advice may have a price. who then reciprocates the seller’s “kindness” with trust and business. Instead. the consumer rarely will be as familiar as a salesperson with the latest financial products. CIALDINI. but also salespersons). supra note__. 143 & 146-47 (2005). 195 Michael Moss. Consumers’ Use of Information Intermediaries and the Impact on Their Information Search Behavior in the Financial Market. “Good” Warnings. or others perceived to be benevolent.4. 191 See Howard Latin. the “Chief Advisor for mutual funds at an internationally successful investment firm” or an “especially caring and honest” accountant with limited experience. 193 See Choi et al. consumers who pay financial experts a fee for advice tend to be less passive and engage in more information search than consumers who rely on the advice of “free” experts or non-experts.188 Selection of inexpert advisors is particularly likely for important financial decisions because as decision stakes and difficulty increase. Once trusted. CONSUMER PSYCHOL. family. reliance on the advisor can become another form of passivity in that the consumer may not sufficiently monitor the advisor’s performance.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 28 expertise and incentives to act in the consumers’ best interests. consumers tend to rely on the advice dispensed by the “expert” closest at hand. at C1 (quoting former loan officer for Aames Financial. As a former loan officer explains: “You don’t lie to your client. or agent is “my broker. Harvard Law School). 55-56 (2002) (statement of Howell E. Although this might appear to be a conscious and rational tradeoff between benevolence and accuracy. 95. Even if consumers knew how to select a qualified expert. 194 ROBERT B.Y. 41 UCLA L. Consumer Trust and Advice Acceptance. 107th Cong. N. as decisions become more emotionally fraught. consumers perceive benevolent advisors to dispense more accurate advice than experts. sellers have broad opportunities to influence consumer financial decisions. 2004. TIMES. 118 (2005). supra note__. the agent or broker “gets” or “finds” a policy or mortgage and the insurer or lender “gives” the coverage or credit. a consumer has little means to determine whether its benefits will outweigh its costs. Financial product salespeople can take advantage of the “reciprocity effect” invoked by “befriending” the consumer. people rely less on rational criteria in favor of emotional criteria. then a mid-sized lender). CONSUMER AFF. Jinkook Lee & Jinsook Cho. When subjects were asked whose advice they would rely on when choosing whether to keep money in a risky investment fund.194 Social mores inhibit customers from challenging the credibility of this new “friend. 55-57 (1994) (citing sources for proposition that consumers frequently ignore written information and instead rely on explanations provided not only by experts such as doctors. 192 Predatory Mortgage Lending Practices: Hrg. 1193. they rely on advice from friends. but when stakes are high. the seller. Even with substantial literacy gleaned from financial education. . and Cognitive Limitations. 141. consumers avoid the tradeoff.190 This is an informational problem too. but you make them feel like you’re their best friend and can be trusted. 189 Tiffany Barnett White.”195 188 However..

e. we have about fifteen papers to okay. REV. 17 J. Cass R. & SOC. Gene A.197 Focusing on the low price of these products.”196 If selling investments or insurance that will have costs now and uncertain benefits later. CONSUMER PSYCHOL. but unconscious biases can not). S164 (2004). Kahn & Baron. are “sold not bought. The insurance industry adage has spread to the rest of the industry—that their wares. One lender training manual directed its loan officers.”199 3. the broker might emphasize higher-level abstract benefits. E. L. Telling consumers they must think more carefully before making a financial decision will have no effect on unconscious biases.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 29 Examples abound.198 Certainly not all attempts to maneuver consumer biases are effective.g. LEGAL STUD. CNNMoney. BEHAV. which are less affected by time and uncertainty biases. 202 Asher Koriat et al. POLITICAL ECON. at 309. particular See Willis. supra note__. Similarly. in different moods. 114 & 117 (1980). at 354 (life insurance). people’s biases frequently take over when they reach real-world decisions. Bernheim et al.. folks. a lender might invoke the representativeness heuristic to calm her. 198 Brunner. Thaler & Shlomo Benartzi. 96. is unlikely to be persuasive. L. their blissful families. If a homeowner is stressed by the mortgage buying process. MAKING 199. Seeing the Forest or the Trees: Implications of Construal Level Theory for Consumer Choice. Ravi Dhar & Eunice Y. Richard H. Debiasing Through Law. ACADEMY OF POL. The potential for biased decisionmaking. If her plan was to build a bedroom for her daughter painted purple. J. 298 (1998) (mortgages). Counterbiasing would be a more accurate term. Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry 34 (Sept. in that these strategies do not train consumers out of their biases. 295. SCI. Similarly.. 201 E. 200 Some have suggested “debiasing” consumer financial decisions by invoking another bias pushing the consumer’s decision in the opposite direction from existing biases.com (Feb. Counterbiasing is not education. Christine Jolls & Cass R. however. 107.g.... credit. in HEURISTICS AND BIASES: THE PSYCHOLOGY OF INTUITIVE JUDGMENT 125-26 (Thomas Gilovich et al. 199 See. Consumers might increase their conscious attention and effort. 2002).. at 186 (citing sources). but they will do so in the same biased way. he would ask the borrower in great detail about her plans for the loan proceeds. EXPERIMENTAL PSYCHOL. supra note__. a better strategy is to remind consumers that buying these products demonstrates their love for. 6 J. Nicholas Epley & Thomas Gilovich. effortful process can be reduced by thinking harder. 97 (2007). Woodward. a former mortgage broker explains that rather than focusing on feasibility dimensions such as monthly payment. eds. supra note__. Sunstein. even when taught about them. but within a single individual at different times.Q. most of these papers are the same ones you signed when you took out your last mortgage.. 18 J. Boundedly Rational Borrowing. Kim. 20 2007) (annuities). 227. Daniel Bergstresser et al. etc. Annuity Options in a Retirement Plan. but as insurance and investment advertising indicates. Walter Updegrave. PROBS.. but are used in service of the desired consumer behavior. 261-67 (2006). 2007) (mutual fund investments). 70 ANNALS OF THE AM. Timothy D. Reasons for Confidence. 209 (2005) (biases occurring through a conscious. multiplying costs and benefits by probabilities. even when taught to engage in expected value calculations. 112 J.201 People are often unable to recognize their biases and prevent the effects of these biases on their decisions. for example. has not gone unnoticed by the financial services industry. The Hard Sell in Consumer Credit: How the Folks in Marketing Can Put You in Court. REP. 197 196 .. Now. particularly under the conditions presented by most personal finance decisions.202 However. A. supra note__. and will be reciprocated by love from. DEC. to announce: “Okay. The Disability Insurance Policy. The Difficulty of Debiasing200 Personal Finance Decisionmaking Biases are resistant to change.g. 249. Wilson et al. U. CHI.: MODERN INSUR. whether insurance. 52 CONSUMER FIN. Sunstein. (2006). then throughout the mortgage purchase process he would invoke the vivid image of the purple room with her daughter enjoying it. when they placed a stack of paperwork in front of refinance mortgage borrowers to sign.P. significant variability in susceptibility to any particular bias exists not only among people. Marsh. biases remain. Save More Tomorrow™: Using Behavioral Economics in Increase Employee Savings. When Effortful Thinking Influences Judgmental Anchoring. 236 (1917) (disability insurance). or investment products.g. Mental Contamination and the Debiasing Problem. E.

301-05 (2000).1E (2000).2-1 et seq. Arkes. BANKRUPTCY REFORM: VALUE OF CREDIT COUNSELING REQUIREMENT IS NOT CLEAR. 31-32 (2005) (discussing studies finding feedback does not decrease biases). DEC. DEC. although on average not entirely. unambiguous. Do Consumers Ever Learn? An Analysis of Segment Behavior in Experimental Markets. but with little success. at 3. over about six months. The most widely cited debiasing method is to give the decisionmaker immediate. (home purchase mortgages). 208 George W. William Eskridge.. Simulated financial decisionmaking in the classroom could be followed by immediate and unambiguous feedback. The Evolution of the Homeownership Education and Counseling Industry. GAO-07-203. 18 J. unambiguous feedback had little success in teaching subjects to make decisions based on expected value calculations. MAKING 19. R. the majority of subjects learned nothing. Unfortunately. Research Institute for Housing America Report No. 00-01 9 (May 2000). 206 Bankruptcy Abuse Prevention and Consumer Protection Act. Credit counseling is now a precondition for filing for bankruptcy206 and. BEHAV. South Carolina High-Cost and Consumer Home Loans Act. 2007) (bankruptcy). McCarthy & Roberto G. Laws § 34-25. the consumer usually faces time pressure to close on the home purchase or loan or to file for bankruptcy to stop a foreclosure. § 106 (2005). After 24 rounds of play. Sieck & Hal R. 31 (2000). MAKING 29. at least not without exacerbating other biases. Agarwal.L. 205 Credit card charges imposed on the heels of late payments are an exception. Georgia Fair Lending Act. 209 E.205 However. for some of their affordable mortgage programs. BEHAV. DEC. Georgia Code Annotated § 7-6A-5 (2002). Gen. an education program might attempt to employ the strategy by requiring feedback before a financial decision is final or after a consumer has experienced a bad financial outcome. In theory. General Statutes of North Carolina § 24-1. U. and accurate feedback over a series of repeated decisions presented in the same form. Jaideep Prabhu & Gerard J. supra note__. at 23 (Apr. VA. many consumers already will have shifted from a decisionmaking to an implementation frame of mind. Quercia.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 30 conditions can reduce the prevalence and influence of biases. 207 E. debiasing feedback could be effective at this juncture. North Carolina Predatory Home Lending Act. & HUMAN PERFORMANCE 149. One Hundred Years of Ineptitude. 13 J. this teaching method of repeat play with immediate. these conditions rarely exist in the context of personal finance decisions. Rhode Island Home Loan Protection Act. and education probably cannot create these conditions. BEHAV.g. this method has sometimes reduced overconfidence. for obtaining certain high-priced mortgages. Repeat Play With Immediate Unambiguous Feedback. However. Tellis. at 26. § 37-23-10 (2003-04).203 but not other biases.210 Time and attention needed to learn new financial decisionmaking processes are scarce.g. Training for Calibration. a form of concrete consequential feedback. Id. But see Winston R. 8. In lab experiments. 204 For example. Hal R.209 Additionally. REV. Much of this learning degrades substantially. L. in some states. with a financial focus. The Role of Probability of Success Estimates in the Sunk Cost Effect. particularly because her sunk costs—the efforts she has just put into hiring an attorney and preparing their documents for bankruptcy or into the home purchase or loan application process—will then be for naught. Card holders generally appear to learn from the imposition of penalty fees. 13 J. All of these have been tried. 203 Sarah Lichtenstein & Baruch Fischhoff. . i. 26 ORG.I. Arkes & Laura Hutzel.208 Once a consumer has committed to a course of action she will be resistant to learning that the decision she just made was poor. 109 P. 149-50 (1980). BEHAV. Providers of popular homeownership education programs conducted by phone report that over 80 percent of their participants already have signed a contract to buy a home when they seek the education. fewer than 7% appeared to learn from the feedback. MAKING 295. 210 GAO. The Recalcitrance of Overconfidence and its Contribution to Decision Aid Neglect.207 Fannie Mae and Freddie Mac require homeownership education..204 Consumers do not receive immediate and unambiguous feedback about their financial decisions based on experience alone because most outcomes are delayed and causation is ambiguous. and 9% learned the wrong lesson leading them to worse decisions with more experience and more feedback.

In practice. accurate feedback. 28 J. 237 (2001). 212 211 . 8. Hilgert et al. lessons learned from prior decisions may no longer apply in light of changes in the marketplace.. CONSUMER RES. 2002). The Case for Motivated Reasoning.219 Nonetheless. 219 The average score nationwide on the Jump$tart 2002 financial literacy test was 50. but learning is not necessarily at work here. the overconfidence bias is unlikely to be reduced.215 Like homeowners after a flood. RES. given that financial troubles are usually attributable to multiple sources. From Bad to Worse: Financial Literacy Drops Further Among 12th Graders (Apr. 216 See Prabhu & Tellis. in JUU. Fitzsimons & Baba Shiv.216 The process of mentally reconstructing past decisionmaking can increase any bias that affected the decision.211 Once people have developed a judgment. BULL.L. A financial education course is required for discharge in bankruptcy. at 129. 23. whereas the average for students who had played the Money Game was 52.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 31 At this juncture. Lee Ross & Craig A. created for the purpose of financial education. also employ immediate. 108 PSYCHOL. 109 P. in addition to the required pre-filing credit counseling. Anderson. consumers who have experienced a bad financial outcome will judge the probability or the costliness (or both) of that outcome to be higher than if they had visualized the outcome vaguely. Shortcomings in the Attribution Process: On the Origins and Maintenance of Erroneous Social Assessments. Hsee. BEHAV. 62 ORG. this difference is less than a single correct answer. they must understand specifically what went wrong in the prior decision and how that information applies to future decisions. this knowledge does not appear to improve financial behavior. Some consumers will change their decisions as a result of counseling. Household Financial Management: The Connection Between Knowledge and Behavior. Elastic Justification. and what they do recall will be shaped by ensuing events. 144-52. they are unlikely to recall their prior decision processes accurately. but frequently misinterpret ambiguous evidence as providing further support for their prior decisions and reject plainly unsupportive evidence. DECISION PROCESSES 330 (1995).4% correct. 218 This has been called the self-serving or attribution bias. Nonconscious and Contaminative Effects of Hypothetical Questions on Subsequent Decision Making. Bhandari & Deaves.213 Consumers may be more amenable to receiving financial education once a bad financial outcome occurs. supra note__. § 105 (2005). for example. But—assuming a better decision could have forestalled the problem—consumers must learn more than that the probability of a costly outcome was high.. education through the game appears to lead to a slight increase in knowledge. contradictory evidence can create an uncomfortable feeling of cognitive dissonance. Jul. a consumer might be following the counselor’s instruction without understanding its basis. 213 Christopher K. 480 (1990). unequivocal. supra note__. 217 Gavan J.212 Although motivated reasoning cannot change the terms of a consumer credit product. by the time consumers have recovered enough from their bad financial experiences to seek financial education. E. BULL. 224. 309.217 Even with perfect recall. because consumers are motivated to justify their past reasoning. because consumers tend to attribute successes to their own abilities and to blame failures on uncontrollable circumstances. Consumers sometimes expend the effort to revise their prior judgments. 215 Marianne A. Because the test consists of 30 multiple choice questions. the future is uncertain enough to allow consumers to reason that they do not need to worry about future interest rate increases because they will refinance before then. Assuming the more financially knowledgeable students do not self-select into playing. With ambiguous feedback. consumers might misinterpret the feedback in a process called motivated reasoning.2% correct. causation will be ambiguous. 214 Bankruptcy Abuse Prevention and Consumer Protection Act.214 Consumers consistently report that they believe the single most important source of learning about personal finance is a difficult experience.g. at 21. 2003 FED. & HUM. as a future uncertain event. Educational financial games such as the Money Game.218 Finally. supra note__. Jump$tart Coalition. students who play the Money Ziva Kunda.

223 Koriat et al. varied. 219-21 (2006). or of her plan to close her other accounts? Is the opposite of her prediction that stocks will go up five percent each year on average the possibility that stocks might perform worse. debiasing did not transfer to tasks presented in new formats.224 In the real world. 220 . the experiments did not test how long the debiasing effect lasted. Lord. Consumer education might teach consumers that they should consider the opposite. & PHIL. Individual Differences. 222 Koriat et al. Years of training can somewhat debias expert decisionmaking about scenarios with which they have become very familiar.. consider-the-opposite does not tell the consumer how to decide between a planned decision and the opposite.220 These results are consistent with the findings of studies that advocate feedback as a debiasing tool. FINANCIAL LITERACY. 24 L. Asking subjects to generate a list of reasons why a bad outcome might occur had no effect on overoptimism about their own LEWIS MANDELL. et al. IMPROVING EDUCATION: 2006 NATIONAL JUMP$TART SURVEY. Bentz et al. C. supra note__. unlike consumers making financial decisions. Paternalism and Cognitive Bias. 173 (2004). 47 J. before finalizing a decision. PSYCHOL. even within their area of expertise. REV. PERSONALITY & SOC. Trout. alternative assessments become more mentally available. subjects trapped in a lab could not choose to spend their time doing something more demonstrably useful than considering the opposite. 26 J. in theory increasing the weight consumers place upon them. Students playing the Money Game probably get better at playing the game. Considering the opposite might lead to paralysis if she can not determine the expected value of the opposite as compared to her prior choice. Rachlinski. supra note__. PSYCHOPATHOLOGY & BEHAV. See Jeffrey J. 1231 (1984). at 167. Another debiasing method is to “consider the opposite...WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 32 Game report poorer financial habits than students who do not. These conditions are seldom jointly available. 224 Cf. 393. and some even listed no reason at all or wrote down supporting rather than contradicting reasons. ASSESSMENT 173.222 By calling them to mind.221 Further. Considering the Opposite: A Corrective Strategy for Social Judgment. Even if a consumer could correctly identify when and how to use the strategy. 221 Lichtenstein & Fischoff. ii. Should she consider the opposite of her plan to keep one credit card account. 73 U. Consider-the-Opposite. no one tells the consumer when and how she should employ the consider-the-opposite strategy. and undistracting environment to carry it out.223 These subjects incurred no opportunity costs in finding an opposite reason. or might perform better? Is her acceptance of the defaults her employer has set for life and disability insurance a decision? Although a financial education class could provide examples of points at which to employ the consider-theopposite strategy. CHI. The Debiasing of Pessimistic Judgments Associated with Anxiety. L. yet whether they would or even could follow this instruction is questionable. J. Subjects in experimental conditions told to write down reasons against their decisions had difficulty doing so.”). and Paternalism..D. 207. and dynamic to teach consumers how to apply the strategy in their lives. EXECUTIVE SUMMARY 9 (2006).” meaning reasons the decision or the assumptions on which it depends might be incorrect. but the most realistic game cannot mirror real-life environments given the possible combinations of conditions in which personal finance decisions are made. at 117. the relationships among financial and nonfinancial decisions. Overconfidence and underconfidence have been moderated somewhat in lab experiments using this technique. 419 (2005) (“The decision-maker must also invest effort in generating specific alternative outcomes. Cognitive Errors. and the ever-changing nature of the marketplace. Bret G. but the change does not appear to translate to other contexts. attentional focus. the world is too unpredictable. supra note__. In these experiments. and … to do so they must have the cognitive capacity. Tests of the consider-the-opposite strategy in experiments resembling consumer decisions have repeatedly failed to debias subjects.

However. . a financial decision. at 137. PERSONALITY & SOC.230 The fruits of any search are likely to depend on which options are salient in the marketplace or suggested by friends or happenstance. When instructed to list the pros and cons of each investment. 60 J. at the expense of less accessible relevant factors. Unless performed using quick heuristic strategy (such as when trying to avoid stress or when in a negative mood. supra note__. Assessment of alternatives begins during the process of finding them. LaFeur. Wilson & Suzanne J.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 33 likelihood of developing a health problem. PSYCHOL. in response to negative emotions and stress. Even when experimenters provided subjects with data about the prevalence of these risk factors. teaching consumers to carefully consider the reasons their predictions might not come true could lead them to worse decisions. iii. Having subjects make a choice and then list supporting and contradicting reasons did not reduce overconfidence. many subjects interpreted the information as depicting worst case scenarios not applicable to themselves. If introspection about reasons for future actions leads to less accurate predictions. Consumers’ encoding of information about alternatives will depend on their moods and 225 226 Weinstein & Klein. Listing the arguments for and against a financial decision or a prediction on which a decision is based would seem to be the next debiasing strategy to try. 229 Koriat et al. That is. the overconfident subjects discounted even self-generated contradicting reasons. listing pros and cons could trigger her thinking to negate the availability heuristic’s influence on her decision. when the decision is not about a controlled game with few features. supra note__. supra note__.. discussed above. Consider the Pros and Cons. Thinking Too Much: Introspection Can Reduce the Quality of Preferences and Decisions. 21 (1995). Schooler. Further. 181. 228 Timothy D. consumers would need to know when they were about to make. leading to omission neglect. this debiasing technique is successful only when pros and cons are listed prior to the decision.228 The accuracy of consumer predictions about their own future behavior is critical in personal financial decisionmaking. Leith & Baumeister. If the less articulable attributes are important. This method has debiased subjects who. the process is recursive. these subjects chose the investments with the higher expected value regardless of payoff amount. Wilson & Jonathan W. To use this debiasing technique. the list of pros and cons is likely to be incomplete. regardless of whether she is underor overconfident to begin with. but had not yet made. 227 Timothy D. Only giving subjects information about their personal standing on relevant risk factors as compared to the general population appears to be a promising route for debiasing overoptimism. PERSONALITY & SOC..229 Once they had made a decision. listing reasons for a decision can decrease decision quality. selected investments based on payoffs rather than taking probability information into account.225 The rough equivalent in the personal finance context would be individualized financial advice. This is not education. PSYCHOL. 191 (1991). EMOTIONAL DECISIONS: TRADEOFF DIFFICULTY AND COPING IN CONSUMER CHOICE 21-33 (2001). 230 MARY FRANCES LUCE ET AL.226 But the process of listing pros and cons focuses attention on factors that the consumer articulates. given that they steadfastly refuse to use statistical data rather than personally-generated beliefs. 68 J. at 1264. described above). subject predictions of their own behavior were less accurate when they listed the reasons why they might or might not engage in the behavior. but about personal finances. For biased consumers. at 117. decisionmaking involving tradeoffs among costs and benefits does not proceed linearly from perception to a hunt for alternatives to research about each alternative to evaluation to decision. as it would avoid the potential misapplication of the consider-the-opposite strategy.227 For example. Effects of Analyzing Reasons on Self-Prediction.

MODELS OF MAN 270-71 (1957).g. but are unlikely to give consumers 231 See. but changes in financial products on the market mean that any list will be quickly out-of-date. Brownstein. can make a decision between them prior to shopping. and manipulation by salespersons or point-of-sale advertising might conceivably be moderated by constructing preferences before entering the marketplace. . Construct Preferences Before Shopping.. iv. this might appear to be the point to do so.231 Once the search stops. with sufficient willpower. you need to know about indexes. and. supra note__. negative amortization. Because a lack of well-defined preferences increases susceptibility to bias. high stakes. they have the illusion they can influence the probability of success.234 But in personal finance matters. they are likely to be inclined toward one option. might reduce the opportunity for biases to operate. can implement that decision at the store. Further.233 Before ascertaining all options. a consumer who lists requirements based on past experience is likely to have difficulty even identifying which products possess those attributes.. at 556-557 (describing studies demonstrating that when subjects examined a set of alternatives attribute by attribute. 233 See. e. subjects were inclined to favor that alternative on subsequent attributes examined). such a result might be better than accepting whatever product the salesperson suggests. This might mitigate the avoidance strategy induced by stress. myopic time bias. they were less likely to neglect any lack of information on a factor they had previously determined to be important. it is too late to use this debiasing strategy. supra note__.” ARM HANDBOOK.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 34 affective responses to their prior information. 234 Kardes. in that the consumer could not end her shopping process without obtaining an acceptable product. the number of attributes that consumers need to consider in today’s complex transactions would limit the extent to which education about one or two aspects could improve consumer decisionmaking. caps on rates and payments. education programs may teach “the list” of attributes to look for. in effect creating a shopping list. and the unpleasantness of considering the negative aspects of life. Although this could easily lead to a satisficing strategy. the consumer might reinterpret the information she already has in light of her commitment. margins. e. supra note__. discounts. even though the only new information they possess is their own decision. even in the face of contrary evidence. If a consumer were to list pros and cons. she probably has made an unconscious decision and will resist changing it. at 301-02 & 303-05. and mortgage markets. In theory.235 Further. at 790. financial literacy education could help consumers construct preferences before shopping by teaching them a checklist of important product features. This may reflect the illusion of control— once people make a decision. constructing preferences first. Given the velocity of change in the insurance. 235 Recall that “to compare two ARMs with each other or to compare an ARM with a fixed-rate mortgage. consumers need to know what the market offers to determine what product attributes are possible and at what cost. When subjects rated the importance of a list of product attributes before they started examining the products in the market. By now. payment options. Arkes & Hutzel. yet afterwards. supra note__. a consumer cannot assess the pros and cons of each. 232 HERBERT A. Even without new information. if one alternative dominated on the first attribute examined. However. A consumer knows the grocery store will have apples and chocolate bars. consumers often “satisfice”—they decide when to stop 232 searching based on their belief that they have found a satisfactory alternative. Educators might try to keep consumers current through public service announcements about frequently-ignored aspects of financial decisions.g. Many personal finance decision aids do just that. and recasting (recalculating) your loan. When shopping for some types of products. the consumer’s collected choice set of alternatives and information about them is biased. SIMON. though. subjects’ probability of success estimates for an investment are higher after they have chosen one than before. the evaluability biases. investment. One study employed this method to reduce the omission neglect bias discussed above.

. custodial care. available at http://njaes. This is a variant on “cooling off” periods permitting consumers to rescind after making the decision. Rutgers New Jersey Agricultural Experiment Station. Additional features (e. They could gather more evidence or reevaluate existing Amer Cheema & Dilip Soman. 33. supra note__. FTC Door to Door Sales Cooling Off Rule. a list of attributes is insufficient to select a financial product without a way to make tradeoffs among attributes. Trust in a salesperson might decrease when the consumer is no longer in the presence of this newfound “friend. 16 J. v. unless a single alternative dominates on all attributes.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 35 a sufficiently deep understanding of the list to feel committed to it. but emotions come and go.” An obvious method of debiasing would be to teach consumers to take time and space for deliberation: a “chilling out” or “warming up” period. Projection Bias in Predicting Future Utility. Time to deliberate could help a consumer sift through information and choices to reduce overload effects. Some sources of biases in financial decisionmaking can subside over time and psychological distance from the salesperson. CONSUMER PSYCHOL. Malleable Mental Accounting: The Effect of Flexibility on the Justification of Attractive Spending and Consumption Decisions. A short example:237 Long-Term Care Insurance Policy Comparison Worksheet Use the worksheet below to list the cost and features of three different long-term care (LTC) insurance policies. 238 Wilson & Schooler. 42-43 (2006).. Because consumers become psychologically committed to the choices they make. 118 Q. Time and Space for Deliberation. The thousands of worksheets in financial education materials do not explain how to choose among alternatives once the information is compiled. 236 .236 Additionally. 16 CFR § 429.g.edu/healthfinance/insurance-ltc.. supra note__. Finally.240 but the usefulness of deliberation time depends on what consumers do with this time. Because a list can induce consumers to weigh each attribute evenly even when one or two attributes are more important. If asked to compare alternatives along a list of attributes. the list of attributes the consumer must consider can itself cause problems. REV. 239 Willis.. collecting this information is likely to be more frustrating than helpful.g.239 The theoretical literature supports the use of cooling off periods for important. premium waiver after 90 days of coverage) Annual/monthly cost Without a way to make tradeoffs among policy features. at 182. Then compare the three providers to determine the best policy for you.. 1239 (2003). etc. 240 George Loewenstein et al. a deliberation period prior to the transaction is preferable. LTC Policy Feature LTC Policy LTC Policy LTC Policy Provider #1 Provider #2 Provider #3 Services covered (e. adult day care. lists are easily brushed aside.asp. 237 The Financial Aspects of Health and Long-Term Care Insurance in Later Life.g.rutgers.238 Asking consumers to consider every relevant piece of information is also likely to lead to information overload. irrevocable decisions.) Amount of daily benefit Length of coverage Elimination period Inflation adjustment Requirement for coverage.. ECON 1209. E. at 214-15. all options can appear to be of similar value. Without commitment to underlying decision rules. For example. home care. consumers find it more difficult to make decisions because all options have some pros and cons. stress or negative emotions occupy mental resources and reduce decisionmaking quality.

What Consumers Know and What They Think They Know. 241 . Thus. the consumer’s emotional response overwhelms that knowledge.242 accountability for the decision. DEC. but within this bound. CONSUMER RES. Alba & J. and more will differ for every consumer. 123. to this consumer. the effectiveness of taking more time to make financial decisions can depend on the consumer’s choice set. even when the information should be This is particularly true for difficult decisions.245 The variation in overconfidence/overoptimism versus underconfidence/pessimism within the consumer population246 poses a significant hurdle for debiasing. Financial literacy education has little hope of changing that. One could devise other debiasing strategies to try. 244 E. ambiguity or uncertainty imbedded within the decision. such that no one discount rate or myopic preference rate can be applied. 30-31. 1250 (2001). and can radically affect the outcomes of debiasing techniques. 27 J. will depend on what the consumer finds salient based on personal experience. depending on the vividness and detail with which each consumer internally visualizes the future uncertain event. But controlling each consumer’s choice set would require regulation.244 The operation of time and uncertainty will differ both across consumers and across situations. Wesley Hutchinson.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 36 evidence to enhance support for their decisions. 124 & 146 (2000). “Framing” effects of context can increase when the decisionmaker is given more time to perceive and incorporate more information. 137-39 (2007). 21 J. Individual Differences. The Impact of Task Complexity on Information Use in Multi-Attribute Decision Making. Although time for deliberation decreases some biases. decision context. BEHAV. not financial education. A common heuristic strategy then employed is to avoid extremes and choose an average alternative. or incommensurability of attributes among alternatives. Information overload causes all consumers to reduce most decisions to a small number of salient characteristics. and immediate environment. On Undesirable Consequences of Thinking: Framing Effects as a Function of Substantive Processing. 242 Eric R. LIT. but giving consumers access to good advice is a policy proscription beyond education. supra note__. 246 See Joseph W. MAKING 125. personality. 243 Dhar. Igoui & Herbert Bless. 360 (2002). The representativeness heuristic operates on the consumer’s personal past experience with products or situations which. 29. others appear to increase or remain unchanged. MAKING 95. socialization. with enough time. average alternative in the choice set is better. 34-35 (1981). Time for deliberation could easily become another excuse for inertia. “Teaching” consumers to take time and distance to deliberate may not add anything to what consumers already know. at 561.. 27 J. Time and space from a salesperson could create an opportunity to consult with friends or experts. The operation of the availability heuristic. 245 Shane Frederick et al. If the initial information received about alternatives was encoded in a biased manner. 6 J.. DEC. but every strategy has the potential to backfire because past experiences. 20 J. memory. 103 Ex. 351. EXPERIMENTAL PSYCHOL. supra note__. for example. deliberating about the encoded information will replicate the bias. cognitive abilities. Boote. BEHAV. Alfred S. values. ECON. Dan Simon et al. ADVERTISING RES. whether due to irrelevant.243 This strategy works well only when the less extreme. Time Discounting and Time Preferences. As noted Brownstein. 40 J. 4 (1993) (showing use of different decisionmaking strategies both inter-subject and intra-subject). The problem is that in the heat of the moment. people faced with incommensurable tradeoffs are more likely to gather and use contextual information such as the nature of the alternatives in the choice set.. consumers consider different attributes and use different choice strategies.241 They could consider the opposite or list the pros and cons. seem similar to the one at hand. Market Segmentation by Personal Values and Salient Product Attributes.g. vi. Consumers know they should not make important financial decisions impulsively and that they should not fall prey to sales techniques. Danielle Timmermans. at 189. For example. The Emergence of Coherence Over the Course of Decision Making.

these “teachable moments” are also vulnerable moments. D. Annamaria Lusardi. particular events can cue a teachable moment. Perhaps they could hit upon a strategy that would debias some consumers.. or deciding how to manage money when first earning it. have experienced a bad financial outcome. consumers who participate in financial literacy programs at teachable moments do not appear to become any more financially literate.251 Applying teachable moments theory to financial literacy education seems intuitively sound.g. or becoming divorced can cue a teachable moment if consumers perceive their responsibility for financial management to increase. not budgeting. Role changes such as becoming part of a couple. Unfortunately. M. the consider-the-opposite strategy decreases overconfidence in some but increases underconfidence in others. as discussed above. A “cueing event” is one that “(1) increases perceptions of personal risk and outcome expectancies. motivating behavior change. Understanding the Potential of Teachable Moments: the Case of Smoking Cessation. 250 C. 18 HEALTH EDUC. Ironically. Reaching Consumers at Teachable and Vulnerable Moments Educators resoundingly agree that personal finance should not be taught in the abstract. RES. 2002) (hereinafter.org/pages/whitepaper2002symposium. McBride. a teachable moment could include the time leading up to the decisions. when consumers are facing a new financial decision.g. they are more willing to take part in personal finance programs. to the extent that consumers are open to trying to learn. Financial literacy education programs today attempt to tailor their content for different audiences based on the financial situation and needs of the audience. supra note__. 9-11. an event that substantially increases financial resources might prompt a sense of new financial selfefficacy and increase receptivity to learning.. consumers are not easily sorted by bias-susceptibility type into different 248 personal finance classes. For habitual financial behaviors. they risk sending the wrong message to some consumers. A teachable moment might be when a consumer is buying a first house. Colorado. or the like can increase perceived probability and costs of poor outcomes.”250 Close experience with bankruptcy. On the flip side. supra note__.”249 For infrequent decisions. obtaining a first credit card. different racial/ethnic groups respond differently to identical financial education programs. have weak pre-existing preferences. [or] (3) redefines self-concept or social role.. (2) prompts strong affective or emotional responses. et al. 251 See. NEFE 2002). “Teachable moments” might be merely “reachable” moments. Research does indicate that. e. but instead at a “teachable moment”—“a point when the information seems immediately relevant and applicable. At these times.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 37 above. such as “overspending” or allowing inertia to take its course (e. Although public education campaigns might be designed to respond to a variety of biases. not signing up for a 401(k)).: THEORY & PRACTICE 156. That is.html#body39. choose the most energy-efficient product) honed over Bentz et al. available at http://www.. The State of Financial Literacy in America—Evolutions and Revolutions 4 (Denver. 248 247 . people are likely to have well-defined preferences (e. some of the time. consumers may be more “reachable. when people have overcome inertia. having children. are most motivated to learn. on average. or have changed social roles in ways that make them feel more responsible for financial matters. When making everyday purchases.g. NEFE 2002. preferring chocolate to vanilla) or welldeveloped decision strategies (e. foreclosure. Oct.nefe. 249 National Endowment for Financial Education. but. Financial Education and the Saving Behavior of African-American and Hispanic Households 23-27 (Sep. but the heterogeneity of responses within groups is large.g. at 178. at 19-21. 162 (2003) (internal citations omitted).” but may not be any more likely to learn about personal finance. and are most likely to integrate their new learning into their existing knowledge. 2005).. A debiasing strategy of listing the pros and cons can lead some people to reduce their prior assessments of the probability of negative consequences247—introducing the possibility that this intervention could lead to overoptimism in some consumers..

Early Intervention and Credit Cardholders 6-7 (Ctr. The required attendance at a personal finance class prior to bankruptcy discharge. it has some additional means at its disposal to reach people. 2005). Few such preferences and decisionmaking strategies exist in the personal finance realm. their choices can be influenced by those who seek to help them or those who seek to exploit them. at 14-15. counseling in this context is unlikely to be educational.259 A number of states require personal finance education in the public schools. or even what choices exist in the market. this education has not been noticeably effective. 16 MKTG. e.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 38 repeated experiences with near-term outcomes.000 delinquent cardholders were offered the reversal of one late fee for taking the course. e. the consequences of past choices and strategies are murky. Missouri. LETTERS 321. Flow of Funds Account Data. 50 AM. SOCIAL SECURITY STATEMENTS: SOCIAL SECURITY ADMINISTRATION SHOULD BETTER EVALUATE WHETHER WORKERS UNDERSTAND THEIR STATEMENTS.256 Voluntary financial education is widely available.260 However. 256 See. supra note__.g. ON REG. 6 (Apr. 258 Brown & Gartner. PSYCHOLOGIST 364. at 3. Survey of the States: Economic and Personal Finance Education in Our Nation’s Schools in 2007.6 percent did so.252 Few know how much and what type of life insurance policy they want. Georgia Fair Lending Act 2002. 253 252 . only 66 percent of adults in a national survey remembered receiving this statement. Federal Reserve Bd. Bettman et al. yet seldom used.257 College students receiving their first credit card are in a potentially “teachable” moment. 1 YALE J. Id. Few consumers have a clear idea of how much they want to save for retirement or a developed strategy about how to allocate it among investments. A New Look at Constructed Choice Processes. 2007). CONSUMER RES. Cajolery or Command: Are Education Campaigns an Adequate Substitute for Regulation?. Even when 42. but when 78. Illinois. GAO-05-192. 260 Seven states–Georgia. Over the course of a seven-year $20 million national television and radio public service campaign waged recently to encourage consumers to save more. Utah—require students to take a personal finance or similar course. Amy Brown & Kimberly Gartner.0 percent. 364 (1995). in the vast majority of cases it will be the latter. 255 TAKING OWNERSHIP.. 167 (1983-84) (examining public health and safety education campaigns). Services Innovation. Idaho.253 The question is who will reach consumers at these vulnerable teachable moments— educators or the financial services industry? Given resource advantages. Dale Griffin et al. Some states have begun requiring “credit counseling” as a condition of consumer purchase of a high-priced mortgage. is also in keeping with See Mitchell & Utkus. at 6 & 8. only 6. David Pittle. and the products and market players are likely to have changed dramatically since consumers’ prior decisions. for Fin. Because many consumers develop preferences and strategies during the decision process. at 3. The Construction of Preference. since 2000 the U. only 28 (. 257 When about 6500 credit card holders were warned that they were at risk of delinquency and offered a free online financial literacy course. 187. at 20... government has sent all adults an annual statement regarding how much they should expect to receive from the program. as explained previously. Robert S. South Dakota. Constructive Consumer Choice Processes.000 of these new cardholders were offered a 60-minute phone card to complete an online financial course. 192 (1998). See National Council on Economic Education. However. supra note__. Louisiana. to encourage retirement savings. 259 GAO.4%) attempted to log onto the website.S. noted above. not even 1% completed it. Educator claims that their “[t]argeted promotion and marketing efforts” can “create teachable moments”254 are implausible. See. Paul Slovic. For example. 261 North Carolina Predatory Home Lending Act 2000. 2007). given their federal paycheck deductions to date... A Report Card (June 13. Adler & R.255 Public education campaigns can even harden attitudes against the information conveyed.03%) completed the course. and only 2 (. 159. 254 NEFE 2002. Jan. James R. personal savings declined from 4. 32223 (2005).g. because major financial decisions are infrequent. as explained above. supra note__.7 percent to negative 2.261 But. supra note__. 25 J. let alone its contents.258 When the government acts as educator.

Forced financial literacy education thus does not look promising. The insurance industry is projected to spend $980 million in advertising to consumers on the internet in 2007. would have lower costs of production and could. But this sales strategy does not work in the financial products market because the products are largely interchangeable—other sellers could offer the same quality product at the same price and reap the benefits of the education without paying the costs. A seller of an easily-understood product that is better in quality or price than competitors’ products has an incentive to educate consumers so as to increase market share. Furthermore.500 apiece. Feb. 21. The odds are tremendously greater that industry. 1317 (2006). The efficacy of these classes is in considerable doubt.com/cardtrak/news/2007/february/21a. We can't compete with that.266 Financial services firms have little economic incentive to provide effective financial literacy education.com/SiteSearch. those consumers would not be required to give the teaching firm their business. N. Mortgage Ads Keep Up Pitch. 2007. 2007.265 The Defense Department recently concluded its mandatory financial education programs provide little defense against poor credit decisions by service members: Although the Department of Defense provides extensive financial training.emarketer. Against the marketing and sales efforts of the financial services industry. undercut the loan price demanded by the teaching firm. Pub. As Woes Grow. as explained above. not having spent their resources on education. The director of one community organization that provides financial education has testified: … We have tried a number of efforts to copy what [home mortgage] predators do…. Executive Director. will reach consumers when they are in teachable vulnerable moments.S. Elizabeth Warren. Instead.org/creditslips/2007/02/ you_are_preappr. Orvis Card. eMarketer. at 50. and not educators.cardweb.aspx?arg=Health%20Insurance. Education does not trump the marketing of these loans and the easy availability of quick cash with few questions asked. You can buy lists of recently divorced people. http://www. Dept. TIMES.9 billion on sending 8 billion solicitations to American families in 2006—over 70 per household.262 Credit card issuers spent $7. ACORN Housing Services at 213-14. Aug. You have to keep doing this time after time.264 Mortgage and insurance brokers spend tremendous resources approaching consumers in person to sell their products. of Defense. they could—and with their newfound education theoretically should—go to rival firms that. 27. firms profit from poor Lisa Phillips. We have used automated dialers…. a significant number of Service members … still fall victim to easy credit widely available around bases or online.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 39 the “cueing events” theory. 2007. therefore. this price cap was enacted into law. In 2006. L. 2007). No.com/news/2007/2/21/Card_Mail. 266 U. available at http://www.html. 25. 265 Testimony of Mike Shea. education provided by nonprofits and the government has no chance. Summary of Insurance Marketing Online: Meeting Customer Expectations?. and the consumer investment and credit industries combined are projected to spend more than twice that much.creditslips. and print media advertising.html. so we have done mailings to those folks. 2007). available at http://www. The Department ultimately concluded lenders should be prohibited from extending credit to service members and their families at more than 36% APR. Credit Slips (Feb. available at http://www. 263 Card Mail. month after month…. Id.Y. Financial education is thus a classic public good. We once had a subprime lender tell us … if you take their total marketing and outreach and apportion [it] to loans closed. 262 . 109-290. radio. If one firm were to provide financial education to consumers. 264 See Louise Story & Vikas Bajaj. Feb 21.com (Aug. it's about $1. 120 Stat. You Are Pre-Approved--8 Billion Times. Military Personnel Financial Services Protection Act.cardtrak. 2006).263 Mortgage lenders have spent over $3 billion since 2000 on television. a prior bankruptcy debtor education program was found to have a small but statistically significant negative effect on consumer outcomes. as explained above. REPORT ON PREDATORY LENDING PRACTICES DIRECTED AT MEMBERS OF THE ARMED FORCES AND THEIR DEPENDENTS 45 (Aug.

com/personal/visa_brings_you/advertising/index. financial literacy education should not be expected to work.”270 In the contest to reach consumers at teachable vulnerable moments. dissipating in a week or even more quickly.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 40 financial literacy. But selling a product requires only that consumers be convinced to buy it. a common feature of decisionmaking for financial products). MAKING 1. 21 J. even if this education will never be effective. One marketing company uses a vast database of “household level consumer financial behavior” to model the behavior of fifty market segments and then classifies every household in America at the “ZIP+4 level … as few as five to ten households. Dan Simon et al. One reaction might be to ask. Harvard Univ. 269 When consumers develop preferences in the course of making a decision (as explained above.. 270 Joint Ctr. DEC. But financial literacy education appears to have a very short shelf life. as explained above. financial literacy education is not demonstrably effective. the failure to find any empirical evidence that the financial literacy education model works is not surprising. http://www. Credit. Far cheaper means exist for grabbing market share than attempting effective financial literacy education.”). and the financial advantage held by sellers of financial products. BEHAV. The Transience of Constructed Preferences. and so any biases the seller must overcome or exploit need only be addressed briefly. the salesperson can ascertain which biases the consumer is vulnerable to by trying a variety of sales tactics. In one-on-one selling. every day. whereas financial education must keep consumers out of trouble all the time.com/claritas/Default. The seller does not care which cognitive or emotional route the consumer follows to get to the product and therefore can use an array of strategies. . Capital and Communities (Mar. THE COSTS OF FINANCIAL LITERACY EDUCATION As explained thus far. the models are designed to work with data from the three credit repository companies.usa. what is the harm in trying? The following sets forth some answers to that question. One advertisement can play to pro-risk.268 Finally.claritas. not that they understand it. the deck is stacked in favor of the financial services industry. Financial literacy advocates believe that with better marketing they could educate consumers at “teachable” moments through the same methods firms use to sell to consumers at these vulnerable moments. and probably never will be an effective solution to consumer finance problems. and motivated reasoning kick in.” To steer financial product sellers right to the individual consumer. the prevalence of decisionmaking biases. for Housing Studies. and investment marketplace. * * * * * Given the foregoing.visa. In light of the velocity of change in the consumer credit. a seller only needs to convince a consumer to buy a product at a single moment in time. optimism bias to encourage use of credit card debt by some consumers (“Life Takes Risk. Once a consumer purchases a financial product. Life Takes VISA®”) and another can play to anxiety or risk-aversion biases to encourage use of credit card debt by other consumers (“With VISA®. A. IV. penalties. 11 (2007). those preferences can be remarkably transient.jsp.html. in every situation. Paradoxical Effects on Consumer Decisionmaking A surprising amount of empirical evidence implies that literacy and education can have paradoxical effects—lowering performance on financial tests and increasing 267 268 See http://www. You’re Protected. 9. sunk costs..269 Financial literacy programs must educate consumers out of their self-defeating biases on a continuous basis.267 Ads reach consumer segments through targeted marketing channels tailored to exploit behavioral tendencies. insurance. 2004) at 75. the innumeracy of much of the population. Even consumers who have completed home buyer education can subsequently be “won over by the marketing pitches of subprime lenders.

BEHAVIOR. 273 DANA MOORE. REV. on average.” but tell us nothing about how literacy affects the likelihood of victimization. The authors admit that “a short-term credit counseling experience and some financial education” is unlikely to improve financial behaviors. Soc. See Lewis Mandell & Linda Schmid Klein. result does not appear to be driven by pre-existing differences in literacy levels between those who do and do not enroll in the courses. Emphasizing the importance of financial literacy may backfire by increasing the stakes and thus. but assert without support that credit counseling “can be most effective when there is continuing counseling and education to improve individuals’ financial behaviors. eighteen months of participation in credit counseling had no effect on financial behaviors. 2003).271 Rather than the conclusion supported by the data.”272 A survey commissioned by the State of Washington to study the financial literacy of victims of predatory home lending shows the same pattern. it could NAT’L ASS’N OF SEC. than elderly nonvictims: A major hypothesis going into the survey was that investment fraud victims do not know as much about investing concepts as non-victims and would therefore score lower on financial literacy questions. at 85. In one. SURVEY OF FINANCIAL LITERACY IN WASHINGTON STATE: KNOWLEDGE..”276 None of these results demonstrate that financial literacy education produces poor decisions. The author surmises that the group who had taken loans with the predatory lender had “lower financial knowledge” and would benefit from a literacy program. the training to have a small negative effect on outcomes. as explained above. The results probably reflect financial literacy gained by victims through the “school of hard knocks. AND EXPERIENCES 60-61 (Wash. once controls for other differences between the groups were added. But that more education could lead to worse financial behavior is not implausible. teaching them more is unlikely to protect them. that financial literacy is positively associated with the incidence of fraud. the study asserts “[t]his finding suggests that financial literacy programs are necessary but probably not sufficient to prevent fraud. 105. For example. Research Ctr.273 But if these borrowers are already more knowledgeable about mortgages.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 41 welfare-impairing financial behaviors. mistakes. SERVS. 276 Mandell. Scis. The study tested borrowers who had taken loans from a predatory home lender against a general population sample. the predatory lending victims knew more about home mortgages. 16 FIN. Studies of education over a longer period of time show no better results. In fact. ATTITUDES. the study found the exact opposite: investment fraud victims scored higher than non-victims on eight financial literacy questions. Id. Motivation and Financial Literacy. but less about investments.”274 Another study comparing bankruptcy debtors who received financial training with those who did not found. supra note__. the National Association of Securities Dealers found elderly consumer fraud victims to be more financially literate. NASD FOUNDATION FRAUD STUDY FINAL REPORT 5 (2006).275 Data from the Jump$tart nationwide survey of high school seniors has consistently shown that financial education does not increase financial knowledge among high school students and that students who take a semester-long personal finance course “tend to do a little worse … than those who do not. 275 Braucher. at 1. State Univ. Because education alerts consumers to the availability of even more financial information and choices. 274 Kim et al. 107 (2007) (citing study finding that a wellregarded financial literacy program did not improve student financial behaviors from one to five years after taking the course). As compared to the general population. supra note__[Eds: Empirical]. even well-respected researchers who discover contrary evidence repeatedly misinterpret it as providing support for the value of the education. 272 271 . supra note__. Yet the belief that financial literacy education is effective runs so deep. & Econ.. Technical Report 03-39. DEALERS.

and thereby decrease decision quality.g. at 18. See. after the training. See. but those with lower literacy exam scores are significantly more confident in their own knowledge than they should be. 284 Mandell. this education may do no more than increase overoptimism and the illusion of being able to control financial risks. supra note__. they became more confident in their ability to handle their own retirement planning. Participants in these programs consistently selfassess as having learned a great deal and having gained confidence.”279 With added confidence. their performance of financial planning tasks did not improve at a statistically significant level. supra note__. 22 BANK. 285 Lusardi & Mitchell.282 In the index fund investment study described above. rather than seeking professional financial advice. supra note__(quoting a consumer just finishing a course: “‘It is amazing how a few changes made me feel empowered. 23 (2005) (“Current ‘debtor education’ programs that focus on money-management skills seem more likely to … enhance the illusion of control that leads to overconfidence in future borrowing. consumers are more likely to make decisions for which they lack sufficient expertise.278 but their poor performance on literacy exams indicates that their confidence is misplaced. Fig. at 5. The authors of the study conclude: “These … findings suggest that commercial financial training seminars may do more harm than good—individuals may feel confident that the quality of their financial planning efforts are sound. DEV. and over 15 percent were in the bottom quartile. 13. and the illusion of knowledge. at 7. choice overload. Stokes & Polansky. and Comparative Consumer Bankruptcy: Searching for Causes and Evaluating Solutions. 278 277 . supra note__.S. they made errors equal to between four and seven years of retirement income.g.’”280 Other studies have also found that investor fraud victims have a higher than average internal locus of control... passim. confidence is not a measure of literacy. half of the respondents who reported that their financial literacy was at the highest end of the scale did not objectively test within the highest quartile of the sample. some of the least knowledgeable consumers appear to be the most confident. Dep’t of Agric. The National Association of Securities Dealers study finding fraud victims to be more financially literate also found that the victims were more likely to agree with the statement “’I rely on my own experience and knowledge to make financial decisions. at 467-68. 279 Hershey et al. supra note__.285 As mentioned above. Kilborn. Overindebtedness.. e.. 281 AARP FOUNDATION. Research shows that consumers with high financial literacy exam scores generally correctly perceive their knowledge levels as high. supra note__. 282 Agnew & Szykman. 69. For example.. the MBAs who reported being “very knowledgeable” about investing made worse investment decisions than all but the MBAs who were least confident. even on questions about saving.”). DEALERS. J. despite clear objective evidence to the contrary. Higher financial literacy itself can lead to overconfidence.’”).WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 42 increase information overload. However. supra note__. In reality. high school students who describe themselves as “very thrifty” have lower average financial literacy scores. supra note__. I made a ‘to do’ list and I am determined to get them all checked off.284 In another large sample of consumers. but promote this belief through their curricula. OFF THE HOOK: REDUCING PARTICIPATION IN TELEMARKETING FRAUD A-11. U.283 Similarly. at 62-63. the portfolios of consumers who are sufficiently confident in their investing acumen to trade frequently underperform the market by much more than the average investor. 283 Choi et al. 280 NAT’L ASS’N OF SEC.281 However. when well-educated consumers approaching retirement age were given three to five hours of financial training in one-on-one or small group settings. C14 (2003). Behavioral Economics. meaning that they believe that they have a great deal of control over their own lives. e. See also Jason J. Financial literacy programs are not only premised on the idea that consumers can 277 control their financial situation.

. For example.. 232 (2001) (“Students with high consumer debt earn poorer grades. as evidence in support of personal finance education. two MasterCards. file for bankruptcy. and others like it. e. 91 AM. Debt and Distress: Evaluating the Psychological Costs of Credit. ECON. it could also be that overconfidence about credit score leads to increased persistence in shopping and thus to lower prices. he told his mother that he had no idea how to get out of his financial mess and did not see much of a future for himself. 287 Id. regardless of whether these investments are from the same sector. & BUS. 2622. signed up for a credit card his freshman year at the University of Texas. For example. members of Congress. and the effect common financial decisions may have on credit scores.286 Even when their choices are index funds holding approximately the same portfolio of stocks. and work more hours to pay their bills. 293 See. A week before his suicide in 1998. drop out of school.292 But is ignorance of financial topics truly to blame for the suicides and myriad of other problems suffered by over-indebted consumers?293 Or is the financial literacy policy model part of the problem. 288 Weinstein & Klein.287 In a number of studies. not the solution? The latter question should be taken seriously. S2184 (daily ed. Finally. … their effect on credit terms. suffer from depression. and academics have cited this story.”289 However. and Compulsive Buying Among American College Students. Choi et al. 213. e. Congress charged the Financial Literacy and Education Commission with increasing consumer “awareness of the availability and significance of credit reports and credit scores in obtaining credit. see. 268-76 (2005). Maxed Out College Students: A Call to Limit Credit Card Solicitations on College Campuses. & PUB. leading to worse decisions. Dodd). 657-58 (2005) (finding high non-mortgage consumer debt associated with low psychological well-being. he could afford the debt on this card. As previously noted.Y.. With a part-time job. 147 CONG. CONSUMER AFF. 8 N. S4957 (daily ed. May 15. … a National Merit Scholar. His parents did not learn that he owed $10. 289 Fair and Accurate Credit Transaction Act of 2003. 108th Cong. 290 Marsha J.g.290 Although this could reflect accurate self-assessments of information not accounted for in credit scores. For similar stories. 286 Shlomo Benartzi & Richard Thaler. American culture has long viewed personal finance decisions as reflecting character traits of responsibility. 125. some consumers taught to diversify simply divide their retirement savings evenly over a menu of investment choices. (2003). 2001) (statement of Sen.291 Financial literacy advocates. 1999)... ECON.”). Sarah Brown et al.000 until he moved home to save money and work off his debts. at 15. 642. 147 Cong. Courchane et al. CREDIT CARDS ON CAMPUS: COSTS AND CONSEQUENCES OF STUDENT DEBT 3 (Consumer Fed’n of Am. supra note__. Consumer Credit Literacy: What Price Perception?. knowledge about the quality of one’s own credit report and score is widely believed to be crucial for personal financial literacy.. he accumulated a Visa. J.U. at 20. Blaming the Consumer Sean Moyer. giving consumers accurate statistical information about health risks led to increased overoptimism.288 Apparently the information became more fodder for the bias. B. 35 J. REV. Money Attitudes.g. supra note__. 13.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 43 Another widespread problem appears to be consumer misinterpretation of the material taught. H. A little bit of knowledge may not always be such a good thing.g.R. Roberts & Eli Jones. PSYCHOL. 291 ROBERT MANNING. inaccurate assumptions can occasionally lead to better outcomes than truth. many will divide their investments evenly among the choices. supra note__. REC. Naive Diversification Strategies in Defined Contribution Savings Plans. (story of Mitzi Pool). Dodd). SCURLOCK. 79. LEGIS. 134 (story of Yvonne Pavey). Mar.. Creola Johnson. 26 ECON. and some evidence causality runs from debt to increased psychological distress). and nine other store and gas cards. POL’Y 191. 60 J. . James A. 2001) (statement of Sen. borrowers who overestimate their creditworthiness as compared to their credit scores appear to receive better prices on home mortgages than those whose self-assessments are closer to their credit scores. 96 (2001). 292 E. 137 (2008). id. But without his parents' knowledge. Rec. at 138-39. Credit Card Use.

a consumer’s losing investment strategy would be difficult to characterize as a direct result of her irresponsibility. greed. 15. Bankrupt Profits: The Credit Industry's Business Model for Postbankruptcy Lending. and wisdom. when their mortgages exceeded the values of their houses).’” as one bankruptcy trustee involved in debtor education explains the philosophy. For example. at A1. Unemployment. or abject stupidity. Given the vagaries of the stock market. is to weigh the costs and benefits of repayment. likely candidates for incurring late fees. Apr.e.”296 In fact. 296 FREDDIE MAC. One lending business model is to seek out consumers who are unreliable in making regular payments and are.” Consumers with late payments. supra note__[Eds:Perspective] at 324 (internal citation omitted).295 Now that financial products are so complex and fluid that few can understand them well. Dying to Get Out of Debt: Consumer Insolvency Law and Suicide in Japan. explains that this behavior is 300 costlier for the lender but optimal for the borrower.com/creditsmart/credit/about. Freddie Mac’s “CreditSmart” course asserts that “[g]ood credit terms and interest rates are earned. laziness.297 But lenders do not lend on the basis of “favorable opinions” about consumers. 239 (2005). frugality.” “healthy” or “unhealthy. . Bankrupt and Swamped With Credit Offers.” Poor financial behavior is seen by some as reflecting mental instability. The language used to talk about educating consumers to be financially literate is replete with morally-charged language of responsibility and blame. & ECON 293 (2003) (“Most financial problems are a result of underlying mental health problems…”). 6 INT’L J. therefore.g. like juveniles who commit crimes.299 The arguably more financially savvy approach to debt. Mayer.” Financial behavior is either “responsible” or “irresponsible. Mark D. either directly or through educational and job opportunities that wealth and class can buy. 07-26 (2007). Shame and Ill Health — An Exploratory Study. good credit terms and interest rates are largely a product of wealth. Caroline E. CREDIT SMART CURRICULUM. 46 J. 298 See Katherine M.html. & ECON. The materials define credit as: The ability of a person to borrow money. 227. she can be blamed for failing to become sufficiently expert to handle her retirement savings. one study finding that borrowers who had received counseling were more likely to default strategically (i. U. Financial literacy education as a policy tool blames the consumer for her own plight. 300 Valentina Hartarska & Claudio Gonzales-Vega. and wealth is largely inherited.L.298 Although many financial education classes are delivered in an encouraging and understanding style. industry. as a consequence of the favorable opinion held by a lender as to the person's financial situation and reliability. Mulligan.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 44 trustworthiness. Rantakeisu. or obtain goods with payments over time. Credit Counseling and Mortgage Termination by LowIncome Households. self-control. available at http://www. Deadweight Costs and the Size of Government. et al. however. West. 299 Braucher. 294 American culture is by no means unique in this respect. REAL ESTATE FIN. over-the-limit fees. 295 Gary S. 30 J. Porter. U. you should pay it.freddiemac. some promote a blame-the-consumer mentality. they lend because they believe they will make a profit from the transaction.294 Consumers are believed to have sufficient control over their financial well-being through their decisions and behavior to be held in moral disapprobation when they are experiencing poor financial outcomes. 2005. “’There’s right and wrong—you owe it. See. and interest charges at high default rates. WASH. Module 1: About Credit.. Iowa Legal Studies Research Paper No.. But with the education model. 297 Id. Becker & Casey B. Financial decisions are either “good” or “bad. e. are “delinquent. but shifts from an indictment of raw moral character traits to the consumer’s “choice” about whether to attend classes and use the information and skills purportedly taught. financial literacy education is a necessary detour on the path to moral blameworthiness.. POST. SOC. WELFARE 13 (1997).

. 307 The Property Solutions Group. injury and medical problems. family and co-workers to see. meaning that humiliation rather than anticipation of material deprivation was the causal link. does all the right things and still charges you interest rates and fees that are higher than you should be paying given your credit history. 16.309 Stigma leads them to keep their problems to themselves. 16. rather than seeking help. and those that engage in these practices should be blamed.. See Braucher. http://www. President Bush recently attributed the rising foreclosure rates of 2007 to consumer failure to read the “fine print” on their mortgages. The high participant nonresponse rate suggests that despite educators’ intentions to the contrary.. at 38.”308 Consumers understand the financial literacy education model of consumer protection to mean that they have only themselves to blame for their financial woes. at 351 & 353. It is no different than shopping for a car and paying more than you would if you bothered to negotiate a lower price.. home repairs. as the cause of their defaults. of Chi. LLC. the program reinforced participants’ shame about their financial behaviors. 16. I couldn’t tell 301 302 LOONIN ET AL. supra. http://www. These losses generally would not have impoverished the victims. Another financial education program used prior to the new bankruptcy law aimed to change debtor “attitudes toward irresponsible spending.com/foreclosure____hush____(last visited Nov. divorce. Partnership Lessons and Results 24 (Neighborhood Hous. http://qbuyhomes.”… [A] lender is not doing anything illegal if it “. you have no one to blame but yourself. 303 Weiner et al. As one consumer said when explaining her reaction to discovering that a home mortgage lender had slipped a 26 percent origination fee into her loan at closing: “I felt so stupid . supra note__. HOPI].. 306 Quality Real Estate Investments.”301 With its focus on the responsibility and efficacy of the individual consumer.”306 by helping them avoid the “stigma and public humiliation” of foreclosure307 and preventing the “embarrassment of … foreclosure information posted in the local newspaper for friends. 2007). and concluded that “[t]here needs to be financial education measures in place.com/ (last visited Nov. But financial services firms know consumers fear that society will blame them for their plight. and credit card mismanagement. 305 Home Ownership Preservation Initiative. 2007).49. supra note__[Eds:Perspective] at 330 & n. other income reduction.php (last visited Nov. death in the family. . Srvcs. teaching consumers to hold themselves responsible for their financial circumstances as a piece with having confidence in their financial self-efficacy.”303 When academics attempted to evaluate this program. but “. the financial literacy model absolves financial services firms and policymakers and deflects inquiry 302 away from systemic societal and market failures. 37 SUICIDE & LIFE-THREATENING BEHAV.foreclosurelms.305 not failure to read loan documents or lack of financial education.” … [T]he lender is “. Numerous websites offer to save consumers’ “dignity. the fact is that if you are a victim. Materials in one of the courses that consumers are required to take as a condition of discharge in bankruptcy state: [C]onsumers can blame lenders if they want.thepropertysolutionsgroup.com/stn01_02_11.. 308 Foreclosure LMS. .. 309 In one study of urban suicides over a several year period. 2007). about 10% were associated with economic issues. 304 Note 2.. 103 (2007).. 2006) [hereinafter. supra note__.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 45 Some programs take a “tough love” approach. simply getting you to pay more than you have to.”304 Defaulting mortgagors surveyed identify job loss. Economic Strain and Suicide Risk: A Qualitative Analysis. Steven Stack & Ira Wasserman. those debtors who participated were less likely to respond to follow-up surveys than control group debtors who did not receive the education. particularly loss of social markers of financial competence such as homeownership and employment.

Palliative. Sean’s mother explained that when he told his parents about his financial problems: “His father and I were appalled that he had gotten into so much debt. 313 HOPI. The Credit Card Binge: College Students are Engaging in Some Risky Spending. PUB. First. it provides a convenient excuse for society to refrain from assisting consumers who are experiencing poor financial outcomes. 315 Margaret Mannix. 2007.. an approach that absolves a wide range of other entities.316 This blame is socially pernicious for a number of reasons. at 2-3 & 22. Aug.S. more often than not.msn. easy go.”310 The Defense Department’s credit counseling program is confidential so that service members will not be deterred from participation by public embarrassment or fear that superiors will treat credit problems as evidence of unworthiness for career advancement. at 311.000 in credit. 316 See MANNING. MSNBC. but shame leads them to send jingle mail instead.317 As a community affairs officer involved in a financial education program put it: Transcript of Record at Day 4. Inc. Dept. of Defense. from responsibility. supra note__. as any financial education course would have suggested. Facing Default. or Something Worse?. Through the lens of the education model.313 The media deride “jingle mail”— homeowners who can not afford their mortgages sending the house keys to the lender and 314 moving out—as evidence of insouciance toward homeownership—easy come.” id. supra note__. the education model makes consumers feel disgraced by poor financial outcomes. The reaction of the late Sean Moyer’s parents when he told them about his financial problems reveals these cultural beliefs.7. 307 (2005). at 25 fig.D. every consumer financial problem looks like the result of poor decisions by the consumer. jingle mail more often would be sent from investment properties.msnbc. REV. p. LOUIS U. Feb. Although very brief cash-flow problems might be handled wisely using credit cards. 2008. they also contribute to poor financial decisions. 2. 2003) (testimony of Velda Durney). But if that were true.COM. I. Americans are known to try to hide unemployment or other serious. 24 ST. 311 U. U. 15.S. make better financial choices. 29. When Staying Alive Means Going Bankrupt. long-term financial woes by keeping themselves afloat on credit card debt that can quickly snowball through high interest rates. perhaps evidence of more extreme embarrassment. Lehman Commercial Paper. 11% of delinquent consumers would not admit that they had any difficulty paying their mortgage.Y. Official Joint Borrowers Comm.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 46 anybody.000. Although few identified embarrassment as a causal factor. No. v. 307.”315 The “appall” is at the consumer. public and private. Contacting the lender to arrange a short sale or deed-in-lieu would be better than a foreclosure for homeowners’ credit reports. 317 Karen Gross explains how the education approach “leads to a ‘blame the victim’ type mentality by erroneously assuming that individual knowledge acquisition alone will produce fundamental change in the consumer financial markets. She was driven into bankruptcy through no fault of her own. Mar. L. NEWS & WORLD REP. But she also concludes that “[a]n educated consumer will. Societal approbation and shame are not only consequences of poor financial straits. One consumer who bought a comprehensive health insurance policy..311 Even when financial literacy is irrelevant. about 30% of borrowers who missed a payment admitted they did not contact their lender. FORECLOSURE AVOIDANCE RESEARCH 6-7 (2005). Some Walk Out on New Homes. 29. Cal. at 36. http://www. More than a third of such consumers responding to one survey reported that the reason they did not contact their lender was because they were embarrassed. despite lack of good evidence this is true.” Karen Gross. 314 John Leland. FREDDIE MAC. but she still felt “devastated and embarrassed. Financial Education: Panacea. 1999. not owner-occupied housing. developed cancer and was charged personally for thousands of dollars of medical expenses her policy should have covered. $10.com/id/20201807/page/2/. 45. 310 . TIMES. Aug. not at the creditor for extending a full-time college student.”312 Many consumers who become delinquent on their home mortgage loans do not contact their lender to try to work out some alternative payment plan. N. In a Freddie Mac study. Vol. SACV 01-0971-DOC (C. 312 Mike Stuckey. supra note__. but we didn't have an extra $10. without rich parents to support him.

. the assumption that consumers are to blame for their financial problems does not always follow. Tellingly. 13 J. supra note__. higher income groups do not need to suffer from their ignorance. where a personal finance program is available to all. We’re asking you to reduce your debt burden. EXTENSION. at 1. while blaming consumers facing foreclosure for failing to read their loan documents. Director’s Law of Public Income Distribution.319 As public schools have begun offering. learn how to manage your money.”318 The financial literacy policy model is also socially pernicious because even as it blames lower wealth consumers and their communities for their financial plight. and credits those with higher incomes with “responsible financial behavior” even when they hire professionals to manage their financial decisions for them.000 or less is: “Absent us raising your wages in this country. The financial education model paradoxically requires those least equipped for the task to make a host of personal financial decisions. those who participated were wealthier.. on average. George J. at 232 (internal quotation marks omitted).”). tracking [income and expenses]. These prospectuses provide clear warning to investors about the 318 319 Lyons et al. When higher socioeconomic level consumers find themselves in financial difficulty. any benefits of financial education are likely to flow disproportionately to higher wealth consumers.323 At the same time. 321 Barbara O’Neil et al. 1. higher income consumers more frequently enroll in and finish it than lower income consumers. even if—and especially if—financial literacy education is largely 324 ineffective.. supra note__. & ECON. Although supporters claim commitment to the ideal that financial literacy education will raise all boats.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 47 What is driving this financial education movement?… Is it the poverty gap in this country?… [W]hat we’re asking people … who make $20. Braucher. the President never mentioned that investors in mortgage-backed securities had failed to read the prospectuses for the billion dollars of mortgage backed securities they bought. whereas the students’ were due to poverty. Cf. 320 Mandell. had more income and more education than the national averages. at 41. 324 Cf. Dec. 37 J. than the students who declined to take the course. more educated. and more creditworthy.320 Those with more income and wealth to begin with can increase their wealth through financial strategies because they have sufficient resources to take high risk-high reward gambles while maintaining a personal safety net. 1-2 (1970) (explaining how public education primarily benefits the middle class). a federal savings education program. we’re asking you to build wealth… We’re asking you to save the little amount of money you’re making.. and yet avoid debt problems. but an increase for socially-advantaged subgroups.322 One study of nonprofit agency personnel who learned to teach financial skills suggested that teachers gained more from the program than students because the teachers’ prior financial problems were due to a lack of financial management skills. supra note__. Even when they are not the population targeted. and even requiring. L. They have resources to hire professional experts such as investment advisors and financial planners to make financial decisions for them. supra note__. 1999. supra note__[Eds:Perspective] at 334 (“Those with higher incomes … may never use budgeting. Stigler. MONEY 2000 Participants: Who are They?. 323 Lyons et al.321 When credit card companies offered online education programs to college students. people voluntarily attending an all-day financial education conference sponsored by Money 2000. 322 Gartner & Todd. Jump$tart has reported an overall decline in literacy. middle and high income children have learning environments more likely to teach financial skills effectively.. … or other techniques recommended by financial management courses. For example. personal finance classes. and clean up your credit history with the little amount of money you’re working with.

REV. The most well-established is the National Council on Economic Education (NCEE).”326 Given the meager plausible returns on financial education. a recent review remarks: “A system that imposes itself to the extent that [this] does on the lives of its beneficiaries should be able to show in compelling fashion that the benefits it provides are commensurate with the level of intrusion and the time and energy devoted by both counselors and participants. i. http://fffl.com/2005/09/30/0000911420-05-000433/Section14. Dickerson.” the document warned. 328 NCEE. Time. § 115C-81 (2006). http://sec. pegs the cost in teacher time at approximately $65. 2007).325 The financial educations of investors probably would have helped them understand the warnings in the prospectuses. it equates to only $50 per school.gov/oversight/OVER06/fispdf/3898-01N.3 (2006).ncee. 332 COLO. § 22.331 The states promote it primarily through the schools. 16. STAT. and distributes millions of grant dollars to fund private-sector financial literacy programs. ANN. STAT. 16. and marketing. http://www.pdf. 325 . but their MBAs did not make them any more likely to read or heed them. Series 2001-4. C. NCEE also spent money on overhead. at 948 (“[I]t is likely that the cost of mandating and paying for credit-based education for all debtors will substantially outweigh any benefits society receives…”). effort.333 For example. Id. these hours and dollars are pitifully few.gov.1165 (2006).mymoney. the costs in time.03 (2007).328 In 2005. VA.327 Yet. COMP.332 Missouri.5 million is a significant sum. http://mymoney. FISCAL NOTE 3 (2006). UTAH CODE ANN. 2007). MICH. N.S. 333 COMMITTEE ON LEGISLATIVE RESEARCH OVERSIGHT DIVISION. 331 U. “[h]igher risks of delinquency may result” because borrowers who could manage payments at the teaser rate “may not be able to afford the monthly payments when the payment amount increases. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 (2006).330 time diverted from other subjects.ORG.mo.edgaronline..gov/grants. but applicable to financial literacy programs more broadly. 329 GRANT THORNTON.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 48 risk of foreclosure. Expense. Aames Mortgage Trust 2001-4 Mortgage Pass-Through Certificates.329 Although $3.1-200. § 17:282. LA. in addition to the cost in student time that would otherwise be spent on other subjects. 16.” Supplement to Prospectus.asp. GEN.ncee.” As these loans “are underwritten at the teaser rate.PDF. STAT.net/about/2005/NCEE_FY_2005_Audit_Report.moga.C. STAT. 50¢ per student. Financial Fitness for Life. About NCEE: Who We Are. Financial Education Grants.shtml (last visited Nov. available at http://www. § 53A-13-108 (2006). 2007). http://www. supra note__. Personal financial literacy education for public school students is mandatory in some states and school districts and elective in others. the cost of materials.net/ (additional time is spent on homework) (last visited Nov. Financial Literacy & Education Commission. NCEE spent $ 3. NCEE’s financial fitness for life program is taught in 15 to 22 classroom lessons. In the context of home ownership education and counseling. § 380. at S-11 (Nov. 30. given the magnitude of what the education policy model aims to achieve. 330 NCEE. supra note__. even as the borrowers themselves were not warned. available at http://www. LAWS SERV. CODE ANN. 327 Cf. COMP. which requires all high school students to take a personal finance course. founded in 1949 with a mission to bring personal finance education to teachers and students.6 million annually. a 2001 publicly-available securities prospectus acknowledged that loans in its pool “include a teaser rate. 105 ILL.net/about/ (last visited Nov. § 22-32-135 (2006). and administrative overhead such as classroom expenses. 2001). development.e. and Inefficient Division of Labor Even if the barriers described above could be overcome. and $30 per teacher reached. REV.5 million directly on its domestic programs. The federal government promotes financial literacy directly through developing and disseminating educational materials.1 (2006). current resources devoted to the project waste millions of hours and dollars every year. 326 Mallach.ncee. and expense of widely effective financial education would be enormous. 5/27-12. ANN. at 29. Nonprofits that fund and operate financial literacy programs range from national organizations to small local groups. an initial interest rate significantly below the fully indexed interest rate at origination.

1E (2007) and FLA.337 The Federal Deposit Insurance Corporation’s Money Smart program for adults consists of ten modules. a lower 341 mortgage interest rate.php (last visited Nov. supra note__. Nat’l Poverty Ctr. 339 John Karl Scholz & Ananth Seshadri. supra note__[Eds:Perspective] at 327-28 & 334. would require exponentially greater resources.. A Freddie Mac study found home loan education delivered through a series of in-person classes had positive effects. or some other perk is awarded. 16.htm (last visited Nov..org/TEXT/homebuying1.. if it were possible. 342 Hirad & Zorn. Conf. In 2006. LOONIN ET AL. 2007). The literacy programs that advocate increasing savings or homeownership warrant skepticism. Racial/Ethnic Differences in Housing Outcomes for First-Time. CODE ANN. POL’Y DEBATE 431 (2007). but participants must spend hours in classes. http://www.2 & 21. etc. supra note__.g. See. Money Smart—An Adult Education Program. 2007)..html (last visited Nov. 336 Consumer Credit Counseling Service. The Assets and Liabilities Held by Low-Income Families. two-hour one-on-one session. GA.340 Participation in voluntary programs. at 26. STAT. adults may also be required to take a financial education course.edu/projects/fsll/home. consumers spent approximately three million hours and $100 million on credit counseling required to file for bankruptcy and financial education required to receive a discharge. is therefore predictably low. Low-Income Home Buyers. § 241. financial educators would analyze each individual’s GAO.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 49 Under certain circumstances. Take the Road to Financial Security in Later Life.gov/consumers/consumer/moneysmart/overview. See ACORN Housing HomeBuyer Program. 335 334 . http://acornhousing. e. 2007). § 420. supra note_.g. at 323-24. 338 Federal Deposit Insurance Corp. Services. 30. Georgia’s Fair Lending Act requires consumers to complete counseling before they can receive a high-cost loan. The foregoing describes the quantity of time and money spent on programs today. lack of resources and information can lead to a rational decision not to participate in voluntary financial literacy programs.cccs-wga. at 319. N. Different programs take widely varying amounts of class and homework time. supra note__. Before attending a class.com/services. Braucher. 340 See Hilgert et al. § 7-6A-5 (2007). and so they are likely to choose to use that time to work more hours to meet financial needs. reducing current consumption to accumulate savings may do more harm than good and moving from renting to homeownership may place them in 339 Opportunity costs of attending “free” personal poorer neighborhood conditions. Shannon Van Zandt.334 In an effort to circumvent predatory home lending. MI. doing homework. some states now require education or counseling as a condition of taking on a high-cost loan. Other states have similar requirements. 341 See.C.336 Many financial literacy education programs do not charge a fee. The Department of Agriculture’s Financial Security in Later Life program provides a free. 2007). finance programs are highest for those who have the least money and time to spare. (Ann Arbor.fdic. but self-study and telephone counseling were ineffective.338 Similar to the reasons for not hiring an expert financial advisor explained above. at 15 tbls. online self-study course which takes only one and a half hours to complete.5088 (2007). The consensus of those who have taken a hard look at the field is that only long-term. each of which takes one or two hours of classroom time.342 A Federal Reserve Board Bulletin article surveys the many “challenges for policymakers and educators in designing and delivering financial literacy education to meet the needs of all groups” and concludes that “in an ideal world.335 Typically. 16. Sept. 18 HOUS. e. 2007). unless high school credit.. effective financial literacy education. 16. 16. http://www. given evidence that for low-income families. GEN. the counseling requirement is satisfied by a free. although some programs involve a series of group classes. For example.umn. traveling to and from the program. three hours and $100 per debtor.html (last visited Nov. http://education. individually-tailored and responsive programs delivered in small classrooms and one-on-one settings might possibly be effective. a consumer has little means to determine whether its benefits will outweigh its costs. STAT. 337 University of Minnesota.

and avoid the other costs of the financial literacy education model.”).344 Human capital resources are most efficiently used when. . 2326 (1986) (“[E]ven assuming universal literacy is attainable. people perform those tasks for which they are best suited. Financial Literacy: An Overview of Practice. generally should not serve as their own financial experts. Counterfactuals are only speculative. necessary for a consumer of average financial literacy to become her own financial expert might yield a lower return when invested in financial education rather than gainful employment. Using this tool can become an excuse for not engaging in the practically formidable task of developing procedural regulation that would effectively match products in the fast-moving financial market with the consumers for which they are appropriate. BULL.”343 One-on-one “education” is not only wildly expensive. 445. supra note__ (finding that students who have goals and beliefs that would tend to make financial literacy less important are less financially literate). Illiteracy and Intervention. but a look at how policymakers have reacted to news of problematic consumer financial products is instructive. Governor Mishkin recently explained that the Federal Reserve Board supports financial literacy programs because “[i]mproving consumers’ economic decision making will enhance the effectiveness of new rules and regulations.C.” it would be better to call it personal financial advice. 84 GEO. to some optimal degree.and resource-intensive.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 50 needs and provide customized training based on that assessment. In effect. If society is willing to pay for this time. D. the authors admit. benefits to 343 Sandra Braunstein & Carolyn Welch. supra note__. Mandell & Klein. FED. as explained above. The decision of consumers with sufficient means to rely on financial advisors is rational and efficient. 83 SOCIAL FORCES 1469 (2005).” But. one-on-one “financial literacy education” is really individualized expert advice.345 Consumers with less means might also be acting rationally in deciding not to 346 The gargantuan amount of time and effort attempt to become financially literate. Mariko Lin Chang.and resource-intensive “education. For example. 456 (Nov. when the marketing of expensive life insurance policies that would provide few. and enforcement toolboxes. L. and act on information over various existing probabilistic asset classes—would be questionable. providing consumers free financial advisors would be far less expensive. Henry T. RES. 346 Cf. With a Little Help from My Friends (and My Financial Planner). “such one-on-one interaction is time. Research and Policy. the counselor intervenes on behalf of the consumer or provides specific instructions the consumer can follow without being financially literate. 2002).. regulatory. 2319. Regulatory Opportunity Costs The pursuit of financial literacy education has opportunity costs. 345 See. 344 Henry Hu has made the same point regarding consumer literacy and individual decisionmaking about investments. it also undermines the case for financial literacy education. Hu. attention. Government authorities frequently pull financial literacy education out of their policymaking. but rather because. 347 Mishkin. process. universal decisionmaking—compelling every individual to gather. J.g. Rather than offering regulations that would be effective on their own. e. and effort of consumers and teachers directly involved. if any. equivalent to providing every consumer with a financial planner.”347 This tool also side-steps the politically formidable task of enacting substantive regulation likely to make many consumers better off but at the price of making some consumers and much of industry worse off. Consumers generally do not serve as their own doctors and lawyers and for reasons of efficient division of labor alone. money. The likely reason one-on-one “education”—commonly called counseling or advice—is “effective” is not because it increases financial literacy. Financial literacy education creates the illusion of regulation without the costs of regulation. Even if every consumer could become her own expert financial advisor. whether through training or predilection. and not only in the time.

for example. 108-263. and then keeping the interest earned on the accounts. 356 RICK JURGENS & CHI CHI WU. 12. No. 351 H. §§ 1601. One VISA card with a $300 credit limit. one issuer charged $444 million in fees on these cards in 2006 and made a net profit of $107 million.350 were introduced and referred to subcommittee. making them financially welfare-decreasing for most if not all consumers. 353 Id. In sum.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 51 servicemembers leaving for the Iraq war was publicized. 980 (daily ed. allowing legislators to both please the financial services industry and campaign as protectors of consumers. One bill regarding home-mortgage escrow accounts tells a story of the watering-down of substantive regulation into consumer protection though educational information. (2003). Nov.S. . BANKRRATE. but providing servicemembers with financial education and counseling. but none received a hearing. When Congressman Charles Bennett. WASH.. POST. Rotten Deals Target those with Damaged Credit.R.351 Promoting financial literacy is politically expedient. In 2003. holding far larger amounts than necessary for escrow. 1663. H. These cards carry fees that dwarf the credit they provide. L. Senators Hillary Clinton and Susan Collins quickly sponsored bipartisan legislation not outlawing these welfaredecreasing policies. from protecting homebuyers from predatory mortgage lending practices349 to capping payday loans at 36 percent. 2407. Although the issuer charged off $728 million consumers never paid. 22.R. $281 in fees are charged to the account. June 10. and the Congressman could report back to his constituents that he was sponsoring legislation to protect them. and then. NO. the bill establishing the Financial Literacy and Education Commission moved through both houses to become law in less than three months. 2005). these debts were mostly the issuer’s own fees on cards consumers received and then thought better of using. REC. to educate them about potential problems. Pub. 108th Cong. Ctr.354 Because few consumers read the fine print. 1952 (codified at 15 U. 117 Stat. These accounts are monies collected from borrowers by lenders to pay periodic bills for taxes and insurance. they are unaware how little credit they have and soon rack up over-the-limit fees. REP. 350 Payday Borrower Protection Act of 2003. Bennett introduced a version requiring only that consumers be given an annual explanation of inflows and outflows from escrow accounts. it included substantive provisions prohibiting overcharges and requiring lenders to pay consumers interest on their escrow balances. Aug. including Congress’s August recess. 10.348 Even when substantive reform legislation is introduced. 108th Cong. it languishes in subcommittee while financial literacy initiatives sail through. (quoting Jeanne Hogarth of the Federal Reserve). But after the banking industry lobbied against the bill. Senator Susan Collins. Regulator reliance on financial literacy education also may come at the cost of effective regulation. Rpt.353 The Mortgage Bankers Association of American promptly endorsed the new bill. 108-159.COM. For example. 2007). 2. Fair and Accurate Credit Transactions Act of 2003. it came to light that lenders were overcharging borrowers. 1681).R. Compromise Reached on Escrow Accounting. FEE-HARVESTERS: LOW-CREDIT HIGH-COST CARDS BLEED CONSUMERS 10 (Nat’l Consumer L. once the card is approved.C. 355 Id. In the late 1980s. H.356 The 348 See Press Release. 149 CONG. requires payment of a $79 application fee. 2002. pt. 979. (2003). Other Financial Services (Dec. Senators Clinton. for example. Sept. then “Congress’ leading advocate of tough new consumer protection against lender abuses in home mortgage escrow accounts”352 first introduced legislation on the topic. Collins Announce Senate Passage of Measure to Educate Men. Women in Uniform on Insurance. 352 Kenneth Harney. bills proposing consumer financial services reforms. Conversely. 354 Lucy Lazarony. 2003).355 The business model is lucrative. consumers pay $360 and have a credit line of $19 when they receive the card. at 1–3 (2003). 1989 at E1. one product that has been on the market for at least a decade is the fee-harvesting credit card. 349 Predatory Mortgage Lending Practices Reduction Act.

CV-96-6159 (C. Met Life to Pay Fine For a Sales Practice. but the consumer welfare returns on these literacy programs might well be lower than the returns that would be generated by using the defendants’ expertise to help develop and/or the defendants’ businesses to experimentally test potential new procedural or substantive regulations. e. The Commission has pursued issuers of fee-harvester cards for misrepresentations. at 448. 1998 (describing settlement of deceptive life insurance sale tactics claims as including money for consumer education). e. available at http://www.”). Long Beach Mortgage Company.aspx?id=3417 (“[T]he civil penalties and costs included in this settlement will be used to help launch a new statewide education program about consumer credit. 107th Cong.gov/forms/company/hmo-foreign-application. supra note__.359 comes at the price of other activities that the credit. TIMES. News Release. California Department of Corporations Announces Ameriquest Mortgage to Pay $325 Million and Undertake Compliance Reforms to Settle States’ Investigations. 5. I believe that we need to teach all Americans the necessary tools to read that map. v. and investment industries could be doing to improve consumer welfare in personal finance transactions. (2002) (testimony of Paul O’Neil. a better outcome than receiving a card and all of its associated fees). insurance. 2006. fraudulent student loans. so that they can reach the Dream.D. N.357 Financial literacy education programs have also become a popular component of litigation settlements between firms and government enforcement agencies. Conn. 2008. rather than banning these cards. available at http://www. Jan. Sept. consumer education). Perry v..S.” http://www. Braunstein & Welch. Attorney General of Pennsylvania.S. as part of settlement of charges of discrimination in mortgage lending. Oct.wvinsurance. predatory mortgage lending. on Banking. An analogous Connecticut law requires state-chartered financial institutions to serve their communities or be prohibited from accepting state or municipal deposits. & Urban Affairs. 2007). 21. credit cards. counterfactuals are speculative.gov/press. Housing.pdf. 360 The State of Financial Literacy and Education in America: Hrg. Firms Reach Settlement in Analyst Inquiry. Secretary of the U. STRAIGHT TALK ABOUT TELEMARKETING 3 (Nov. such as taking application money without issuing any cards (for most consumers. 2006). Stephen Labaton. . §§ 36a-30 et seq. 10 Wall St. “[financial literacy] activities are often given favorable consideration in examinations for compliance with the Community Reinvestment Act”. regulator acceptance of firm sponsorship of financial literacy programs for purposes of meeting obligations under the Community Reinvestment Act. U. Gen. home loans and other financial issues. ironically.attorneygeneral. 2003 (listing $80 million for investor education as among the settlement terms agreed to by investment firms). $30 million that States could use for. 20.ca.358 Again.. Feb. Before the S. FEDERAL TRADE COMMISSION.corp. helping every Pennsylvania family make wise choices about college financing. to contribute one million dollars to consumer education programs). — Secretary of the Treasury Paul O’Neill360 The financial literacy education policy model locates the problem of and solution to poor financial outcomes in the consumer. deceptive insurance sale tactics. Press Release in Lehigh Valley College Probe.pdf (announcing as part of settlement of predatory mortgage lending charges. 23. Dept. but these might as easily be conceptualized as 357 See.g. analogous state laws. fraudulent investment advice. A Health Maintenance Organization applying for a license to sell insurance in West Virginia must submit its “plans for community education and public relations.g. Comm. TIMES. So too.Y. Cal. First National Bank.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 52 federal government’s response has been to publish consumer education materials. N. 1996) (agreeing. or state licensing schemes. Stats. CONCLUSION Financial education can be compared to a road map to the American Dream. 359 A number of examples: For financial institutions subject to the statute. of the Treasury). 29. Apr. V. etc. The Seventh Circuit decided a fee-harvester card “offers value to the consumer” in the form of a small amount of credit.Y.gov/pressrel/06/corp/nr0601.3d 816 (7th Cir. 358 Settlement Agreement and Order Thereon. Funding for these programs has been accepted as consideration in exchange for settlement in cases alleging discriminatory mortgage lending.. (informing consumers “most” advance-fee credit card offers are “scams”). 459 F.

complex.. but the interaction between the two creates welfare-impairing outcomes. See. Policy Options to Improve Financial Education: Equipping Families for their Financial Futures. e. Cf.362 One way to increase the resources with which consumers face the market would be to establish a system of trustworthy expert intermediaries to advise consumers on welfare-enhancing financial products and services. True Transparency. e. Financial Information Service Centres of Ireland..”). because the market will always have an incentive to set defaults that transfer wealth from consumers to sellers. No. and ever-changing financial services marketplace. L. but also would reduce consumer anxiety about making financial decisions on their own. Thaler & Benartzi.ie/providers/providers_centres. accessible system of neutral financially-trained intermediaries who would advise consumers on financial products and services. The variety. changing the financial decision environment. and insurance positions they are left in would be welfare-enhancing for the average consumer. and either adding a new intermediary or professionalizing the financial product sales force will add costs to all sales transactions.g. REV. Yet these measures might well be less expensive than even theoretically effective universal financial literacy education. credit. 106 (2002). Nothing is inherently wrong with either consumers or the modern. Welfare-enhancing defaults as opposed to market-set defaults would be more likely to further autonomy. supra note__. 109-289. Affordable expert advice might be provided through a publicly-funded. similar in structure to the Army Corps of Engineers or AmeriCorps. e. 365 See. Switching the Default Rule.. simultaneously conserving consumer decisionmaking resources. Willis. For example. L. the retirement. Pub. New America Foundation Issue Brief 11 (June 2006) (“A “Financial Service Corps” of financial and tax advisors. and sheer number of products available in the marketplace would Shlomo Benartzi et al. however.citizensinformationboard. 120 Stat. akin to pro bono legal advice. Choice Architecture and Retirement Saving Plans (July 2007). 364 Pension Protection Act of 2006. Affordable Expert Advice. Expert financial advice not only would allow consumers to piggyback off of the financial literacy of a professional. although not a formal denial of choice. Cass Sunstein.. one of the effects of mental discounting of tangible costs and benefits over time and uncertainty. or bringing seller incentives in line with consumer incentives. Potential general approaches to improve that interaction include enhancing the resources with which consumers approach the market.html (website of Ireland’s public financial advice service).363 Defaults could be set such that when consumers fail to make personal financial decisions. but today’s market-set defaults pose the same burden. Certainly subsidized experts would be costly to the public fisc.Y. 362 361 .WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 53 part of the “choice architecture”361 of consumer financial decisions. Leslie Parrish & Lisa Servon. 77 N. Strong defaults.g. as now permitted but not required by the Pension Protection Act of 2006. http://www.g. creating the societal efficiencies inherent in specialization. and a decrease in wealth diminishes autonomy. 3. supra note __. would burden consumer choice with the costs of opting out. despite their decisionmaking biases and low financial literacy levels. Money Advice and Budgeting Service of Ireland.365 Financial products could be changed so as to make it easier for consumers to choose among them well.364 default rules could place consumers into relatively high retirement savings rates to exploit consumer procrastination in financial planning. Welfare-Enhancing Defaults. Expert advice would narrow the choice set presented to individual consumers. at 821-23. 2. 363 See. True transparency would require simplifying the financial products available so that costs and benefits would be clear to consumers.U. 780 (2006). should be created to ensure that all Americans have access to financial planning services. complexity. For example: 1. alleviating stress and freeing up more mental resources to use to make the decisions well.ie/.mabs. http://www.

73 U. Jr. yet only decisions made under transparent conditions can be truly autonomous. 367 See. Financial products. terms. and quality well enough to comparison shop.367 Seller actions that harm consumer financial welfare could be deterred by imposing liability on sellers when their products cause consumer injury. or investment vehicles could be structured would avoid information and choice overload. the latter’s salaries might be paid on a flat fee basis. Lloyd T. Strict liability might be imposed on providers of financial products when their products’ defects cause consumer injury. CIN. allowing borrowers to select their own loan servicers.. sellers might be charged with fiduciary duties to consumers. REV.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 54 need to be reduced. Aligning Incentives.15 HOUS. and servicers might be changed by banning prepayment penalties and up-front fees that inhibit borrowers from refinancing with other lenders. Moreover. For example. e. Wilson. Simplifying the market this way would not be a solution—consumers who do not understand the reasoning behind the rule might be fairly easily swayed by salespeople and their own biases to abandon it—but simplification would be an improvement. Under this policy model. 2007 U.366 There are a number of ways in which the incentives of sellers of consumer financial products might be brought into closer alignment with consumers’ best interests. Private Liability for Reckless Consumer Lending. POL’Y DEBATE 753 (2004). 1471 (2005). given the host of contributors to any consumer financial injury. Personal finance education in such a context might be useful. Sellers of investments might be given an interest in the investor’s long term well-being through price structures that reflect investment performance over time.. price. REV. are both open questions. and whether consumers could cost-effectively enforce a broad standard. and quality competition among sellers can only be effectuated by consumers who understand the products’ prices. e. insurance plans. L. 5.g. the resulting decisions could be good ones. Absent competition. John A. because it does appear that most people can be effectively taught rules-of-thumb. This intervention in the market would reduce consumer choice. . If the products were structured such that a consumer would be able to apply the rule of thumb correctly. but pure comparative negligence principles might be tweaked to limit firms’ liability to their proportionate contribution to the damages. Kurt Eggert. Incentives might be aligned through detailed regulations tailored for particular products and sales channels or through a broad standard requiring industry to determine how to align incentives. requiring sellers or holders to compensate communities for the externalities of foreclosure. causation would be difficult to prove.. the market inevitably will function inefficiently. investors. and abrogating the holderin-due course doctrine.E. Limiting Abuse and Opportunism by Mortgage Servicers. To prevent conflicts of interest between consumers and salespeople. enforceable through a licensing scheme requiring sellers to be bonded or insured in amounts that might depend on claims history. like other consumer products. ILL. Products Liability. L. Effecting Responsibility in the Mortgage Broker-Borrower Relationship: A Role for Agency Principles in Predatory Lending Regulation. The incentives of mortgage sellers. This policy response also depends on the ability of consumers to bring actions 366 See. 405. Insurer incentives might be moved toward insureds’ interests by requiring insurers to maintain high policy member satisfaction ratings to continue doing business in a state from year to year. term. leaving courts to decide whether the burden of preventing financial injury to the consumer exceeds the magnitude of that injury multiplied by its likelihood of occurring. 4. giving consumers a realistic opportunity to compare the costs and benefits of the available options. Whether the government could keep up with the market well enough to keep such incentives in place through detailed regulations. difficult-to-enforce fiduciary duties on financial product sellers have not truly tested the potential for aligning incentives. Pottow. But current vague. could be governed by a negligence standard. Limiting the ways in which credit arrangements.g.

Nevertheless. 36 LOY. A Tale of Three Markets: The Law and Economics of Predatory Lending. in terms of reflecting the consumer’s own goals and values and providing the consumer with a sense of personal control over her decisions. L. utility payments. Unsafe at Any Rate. 368 See. they cut up their credit cards or freeze them in ice. the social security administration could pay landlords and utility companies directly with the remainder distributed to beneficiaries on a weekly basis. Self-Control Devices. the transaction costs of going through individuals’ accounts would be reduced. Engel & Patricia A. 1255. borne by these consumers’ communities. It appears that little attention has been paid to how regulation might provide consumers with self-control devices. For example. 369 E. rather than giving consumers. e. piggybanks that must be broken to open). and. their costs would increase. environment. Kurt Eggert. These limits on individual choice present the central paradox of the ownership society in the modern marketplace of consumer financial services: to enhance true consumer autonomy. 1260 (May 2002) (proposing suitability requirement for home mortgages). Kathleen C. a marketplace of substantively unregulated financial products also has a price. Each of these approaches would limit “consumer choice” in some respect. and consumers can usually evade their own prior commitments.. in some instances. to give consumers more ownership and control over their own daily lives and ultimate destinies. To the extent that funds could be directly moved from income sources to expense creditors.g.368 Another possibility is to create more devices through which consumers could control their own to future financial actions. But policymakers might design and make available more of these devices to more consumers. Of course. L. etc. Many such devices already exist—consumers commit to life-insurance and long-term-care insurance policies by putting all their past contributions to these policies at risk if they stop making payments. REV. 7. 693 (2003). McCoy. the government might create systems through which income flows from employment or pensions more closely matched expense flows for rent or mortgage payments. For example. Because even the most esoteric of financial product structures have some consumers for whom they are appropriate. Elizabeth Warren. the cost of that reduced choice would be borne by these consumers. 80 TEX.A. Regulation currently assists or incentivizes consumers to use some of these devices. particularly those with no other source of income. taxes on retirement funds and home equity savings are deferred and the government collects and distributes over-withheld taxes. social security and disability payments in monthly lump sums. retirement funds. they have their employers over-withhold taxes. . But products liability principles might prove easier for courts to apply than vague fiduciary duties.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 55 cost-effectively (perhaps through attorney fees provisions) and often at a time when the consumer is already overwhelmed by financial distress. REV. etc. Thaler & Benartzi. Substantive Regulation. supra note__[Eds: Save More]. these devices are optional. Lashed to the Mast and Crying for Help: How Self-Limitation of Autonomy Can Protect Elders from Predatory Lending. thereby avoiding the effects of time-bias and perhaps protecting themselves against future decisions that might otherwise be made under the influence of stress or persuasive sales tactics. More generally. actions. so much more thinking needs to be done here. one currently borne by those consumers who receive financial products that are inappropriate for their needs. yet enhance both consumer financial outcomes and functional autonomy.369 Prohibiting the sale of financial products with particular risky or outright harmful components would reduce consumer choice most directly. although to the extent that income sources or expense creditors would need to engage in more transactions.. 6. Even consumers who purchase good financial products today would be spared the cost of searching through the multitude of poor products currently on the market if substantive regulation were employed. 5 DEMOCRACY 1 (2007). they budget and use savings vehicles that are costly to open (CDs. home equity build-up. and life path.g. L. at a price.

. To ultimately have true control over their lives. skills. 370 See generally R. motivations.370 The financial literacy education model is premised on the promise of consumer sovereignty. that consumers can be taught to make welfare-enhancing choices in the insurance. giving them a guide. and ultimately their values. In the real. taking care not hinder marketplace changes that would enhance consumer welfare. and behavioral traits. To be successful. those choices must be made in a context that consumers can navigate. The failed social policy of financial literacy education denies this paradox. the price of such an education would be so high as to reduce social welfare. if it were possible. education would train every consumer to be financially literate and would motivate every consumer to use that literacy to make good choices. Lipsey & Kelvin Lancaster. Such regulatory interventions must navigate the heterogeneity of consumer knowledge. the model is an attempt at social engineering. but their thought processes. credit. and more rather than less education would be desirable. such an education is not possible. each legal intervention will undoubtedly need to be both context-specific and amenable to change as the market evolves.WILLIS AGAINST FINANCIAL LITERACY EDUCATION – 3/20/08 DRAFT 56 requires regulatory interventions in that marketplace that limit formal choice. but to be truly autonomous. Unfortunately. and diverts attention from more creative approaches to improve consumer financial transactions. In an idealized first-best world. or building more direct routes to the American Dream—is likely to be more efficacious. consumers need to have less formal control over some decisions in their lives. the model dupes consumers into thinking they can master the financial services market. trained to read and travel “the road map to the American Dream. time-intensive and costly task. This is a delicate. The costs of the education model would be low enough and the benefits high enough that empowered citizens of the ownership society could flourish. The challenge now is to develop and implement policies and legal rules that will reshape the consumer financial services market into a landscape conducive to good consumer decisions and outcomes. STUDIES 11 (1956-57). and investment marketplace. challenging. consumers are but wealth maximizers. where all people are far above average. while placing blame upon them for their failure to do so. In the world that financial literacy education advocates. second-best world. looking out for their own financial interests rather than shared societal and civic goals. Consumers can make welfareenhancing choices. or.G. Overtly. Covertly. The General Theory of the Second Best. 24 REV. trying to change not only consumers’ skills. feelings.” Ironically. requiring requisition of the resources currently spent on financial education and more. and at a lower cost. ECON. the model ensures instead the sovereignty of the market. less rather than more financial literacy education may be better. deflecting political pressure for change. But changing the personal finance market or the manner in which consumers must maneuver in it—making the map easier to read and follow.